Moody’s: CMBS Loss Severities Climbs

Commercial mortgage-backed securities’ loss severities bounced back to late-2014 levels in the second quarter after dipping in the first, reported Moody’s, New York. 

Special servicers liquidated 234 loans for a loss severity of 41.6 percent, compared to 141 loans with a loss severity of 24.5 percent in the first quarter. 

“The aberration in the first quarter was largely due to liquidations of loans with high disposition balances but de minimis loss severities,” Moody’s Second Quarter Loss Severities report said. The average disposed balance in the second quarter equaled $11.5 million compared to $16.5 million in the first. 

Brian Olasov, executive director of financial services consulting with Carlton Fields Jorden Burt, Atlanta, said the research confirms conventional wisdom in some ways and surprises in others. “First, vintage matters,” he said. “The top-of-market years of 2006 and 2007 contribute nearly 56 percent of all realized losses from 1998 forward.” 

Olasov also said when one liquidates and how long it takes to resolve a loan matters. “Loss severities, particularly with preferred property types like multifamily, have declined as cap rates have compressed and liquidity chases deals, he said. “At an extreme, when resolutions exceed 60 months, average loss severities top 100 percent. And liquid markets matter. While New York and Los Angeles metros are among the highest absolute dollar loss markets as a result of loan concentrations, loss severities are among the lowest–bidders flock to the major markets.”

Moody’s reported $36.4 billion in realized losses to date. “This is slightly more than half of lifetime losses to be realized against the CMBS universe,” Olasov said. “As an example, for 2007 vintage deals, realized losses incurred to date are roughly $11 billion. Moody’s anticipates an additional $15-16 billion in lifetime losses from 2007 deals alone. We’re still swimming in the wake of the financial crisis.” 
Meanwhile, DebtX, Boston, said CMBS collateral mortgage prices increased modestly last month. 

“CMBS loan prices saw a slight increase in July and continued to post gains year-over-year,” said Will Mercer, managing director with DebtX, which provides third-party loan valuation services. “The uptick in price was due to a small improvement in loan-to-value and slightly lower interest rates.” 

DebtX reported that the estimated price of whole loans securing U.S. CMBS increased to 99.1 percent in July from 98.6 percent at the end of June and 95.6 percent in July 2014. Median adjusted loan-to-value ratios decreased to 57 percent in July, while the median debt service coverage ratio increased to 1.45. The median estimated loan yield remained 4.3 percent.