CMBS Default Rate Slips

The cumulative loan default rate for fixed-rate commercial mortgage-backed securities fell slightly to 12.9 percent in the first half of 2016 from 13 percent at year-end 2015, reported Fitch Ratings, New York. 

The CMBS loan default rate equaled 13.3 percent one year ago, Fitch said. “The decline is due to steady issuance levels combined with overall low term default rates,” Fitch’s U.S. CMBS Market Trends report said. 

Brian Olasov, Executive Director of Financial Services consulting with Carlton Fields, New York, noted a well-recognized default ramp from origination to the initial default. “CMBS 2.0 deals have experienced an unusually slow ramp in comparison with legacy deals,” he said. “That undermines critics who argue that we’re back to pre-crisis underwriting.” 

Olasov said the “slow but consistent” build among maturity defaults should cause greater concern because new CMBS issuance is inadequate to take out ballooning loans. “The preferred source of refinancing–community and regional banks–is under increasing regulatory pressure,” he said. “Up until now, the dreaded ‘Wall of Maturities’ has proven not to be so dreadful after all. But that changes if regulators force banks to backpedal on new originations.”

In the first half of 2016, 106 loans totaling $1.44 billion defaulted during their loan term, compared to 109 loans totaling $1.45 billion in 1H 2015, Fitch said. The average size of the newly defaulted loans equaled $13.5 million. 

Olasov noted that starting in late December, CMBS issuers must retain 5 percent of every new deal issued or find a B-piece buyer willing to take on that risk, which could decrease CMBS originations. He said Wells Fargo announced the $870.6 million WFCM 2016-BNK1 deal–the first to comply with that requirement–on Monday.

Kroll Bond Rating Agency, New York, called WFCM 2016-BNK1 a “landmark” securitization, “as it will be the first CMBS transaction which includes a retained interest that is intended to meet the definition of an ‘eligible vertical interest’ pursuant to the U.S. risk retention rules.” 

KBRA said the sponsor and originators that contributed loans to the securitization intend to retain risk to comply with the regulation. “As such, it will provide the marketplace with a much-needed structural example of a vertical risk retention execution and will also provide adequate time for market constituents, as well as regulators, to provide feedback on the structure that can be utilized in future transactions.

While KBRA said it views the transaction’s launch positively, it noted that vertical retention structures may not be practical for a number of market constituents that will prefer horizontal structures, which have yet to be tested.