CMBS Loss Severities Drop, Resolutions Shorten
U.S. commercial mortgage-backed securities loan loss severities dropped last year despite a backlog of maturing loans from the 2007 vintage, reported Fitch Ratings, New York.
Fitch’s annual U.S. CMBS Loss Study said loss severities finished the year lower because peak vintage maturing loans took “quick trips” to special servicing to facilitate refinancing during 2017. The average loss severity for loans that experienced a loss fell “substantially” last year to 35.6 percent from 50.4 percent in 2016, the report said. The total average loss severity for all loans also fell last year to 20.2 percent compared to 28.7 percent in 2016.
“More CMBS loans were resolved with minimal and in some cases no losses at all in 2017,” Fitch Ratings Senior Director Karen Trebach said. “On the other end of the spectrum, only four loans had losses greater than $50 million in 2017 compared with nine in 2016.”
Trebach called one of the largest loans resolved with a loss “integral” to lowering the average severity. The previously modified Beacon Seattle & DC Portfolio loan experienced a loss severity of just 2.4 percent. Without that portfolio, the average loss severity would have been 42.1 percent, much more in line with the last few years.
Not surprisingly, losses were most severe among retail properties at 51.3 percent while office fell to one of the lowest loss severities at 28.5 percent–39.5 percent when excluding the Beacon Seattle & DC Portfolio–Fitch said.
“Resolutions of newly transferred loans at or around maturity significantly outweighed resolutions of loans that transferred earlier during their term,” the report said.
Looking ahead, Fitch said loss severity averages will likely be higher in both 2018 and 2019 than it was last year because there will be fewer resolutions of maturity defaults with low loss severities to counterbalance the resolutions of adversely selected loans. “Loan resolution time also stands to increase as these aged real estate owned assets are resolved,” Trebach said.
Meanwhile, the CMBS delinquency rate fell to its lowest level since 2008 Financial Crisis in May as distressed legacy loans are resolved and new loans are originated and securitized “at a brisk pace,” reported Trepp, New York.
The overall delinquency rate for commercial real estate loans in CMBS fell 24 basis points during the month to 4.12 percent, down 135 basis points from one year ago, Trepp said.
May’s CMBS delinquency rate broke the previous post-crisis low, 4.15 percent, seen in February 2016. The delinquency rate peaked at 10.34 percent in July 2012.
DebtX, Boston, said prices of commercial real estate loans underlying CMBS declined in April. The estimated price of whole loans securing the CMBS universe fell to 95.8 percent at the end of April from 96.7 in March. Prices equaled 98.7 percent in April 2017.
“The decrease in loan prices in the CMBS universe in April was driven primarily by an increase in U.S. Treasuries,” DebtX Managing Director Will Mercer said.
DebtX reported the median adjusted loan-to-value remained at 58 percent and the median debt service coverage ratio held steady at 1.52 in April. The median estimated loan yield increased to 4.7 percent.
