Commercial Mortgage News

Standard & Poor's has placed more than 1,000 U.S. conduit and fusion commercial mortgage-backed securities deals on "watch negative." S&P says the move does not represent a change in the expected performance of pools but rather a change in its CMBS criteria. The main change is a revision of credit enhancement levels in line with an effort to establish ones that enable securities carrying top investment-grade ratings of AAA to "withstand market conditions commensurate with an extreme economic downturn without defaulting." S&P said its analysis has resulted in a AAA credit enhancement figure of 19% for the "archetypical" pool. "We determined the higher enhancement level based on a number of factors, but primarily on our assessment of potential commercial property value declines in the range of 40% to 50% under conditions of extreme stress, such as during the Great Depression," the rating agency said. "This represents a major recalibration of our CMBS criteria and is intended to make U.S. CMBS ratings more comparable with ratings in other sectors." S&P also said, "While the new criteria represents a major change in our opinion of what might happen under highly stressful conditions, it does not represent a change in our view of the expected performance of commercial pools under current conditions."

There is a disconnect between how the market prices residential mortgage-backed securities and their intrinsic value, according to a recent study by Fitch Solutions to gauge the factors driving the valuations of RMBS tranches. The case study, entitled, "What Moves RMBS Tranche Values? A Case Study," compared observed valuations of RMBS bonds in the market with internally derived discounted cash flow valuations based on a range of default and loss assumptions. One goal of the study was to find the loss assumptions that would cause the modeled price to converge with the market price. According to the report, the market expectation regarding future losses is on average 32%, which can be decomposed into a pool default rate of 40%, with 80% loss severity. Vintage and performance are key determinants. "With structural features clearly having an impact on price sensitivity, it is now more important than ever to understand slight nuances from deal-to deal through in-depth cash flow modeling," said Richard Hrvatin, Fitch managing director and author of the report.

Commercial real estate prices as measured by Moody's/REAL Commercial Property Price Indices decreased 8.6% in April, leaving the index at 25.3% below its level a year ago and 29.5% below the peak in prices measured in October 2007. According to Moody's, the large negative return for April likely reflects that deals closed during that month were negotiated at the end of 2008 and in the first quarter of 2009, when securities markets and overall sentiment were plunging. "The size of April's decline, following a 5.5% decline in January, also suggests that sellers are beginning to capitulate to the realities of commercial real estate markets," says Moody's managing director Nick Levidy. The South has been the worst performing region over the last year, with an annual decline of more than 20%. Commercial real estate has performed worse in Southern California than in the Western region as a whole. In Southern California, the office market has been the worst performer, with prices dropping 22.2% in the last year.

Mission Capital Advisors LLC, New York, is marketing a portfolio of commercial mortgage loans for an unnamed commercial bank with an outstanding balance of $158 million. These are performing, sub- and non-performing assets secured by a variety of collateral types, including office, hospitality, industrial warehouse, self storage, multifamily, condominium and commercial development land, throughout multiple states. Mission Capital is initially soliciting indicative bids (on July 8) from prospective bidders for the purchase of individual loans, any combination of loans, or the entire portfolio. Overall, the package contains 12 loans secured by collateral in New York, California, Florida, and Mississippi.

A majority of respondents to the first-ever mid-year version of an annual survey of foreign investors in real estate indicated they plan to invest some debt or equity in U.S. real estate before 2009 ends, even though many have not made any such investments so far. "Three quarters of the survey respondents had not yet invested in 2009; however, more than two-thirds of them plan to invest some debt or equity in U.S. real estate before the end of the year," the Association of Foreign Investors in Real Estate, Washington, said. Thirty-one percent of the respondents to the survey conducted by the University of Wisconsin-Madison's James A. Graaskamp Center for Real Estate said they were more optimistic than at the beginning of the year, while 16% said they were more pessimistic and 53% said their expectations had not changed.

There was a very slight decrease in the amount of commercial/multifamily mortgage debt outstanding between the end of the fourth quarter 2008 and the end of the first quarter of 2009, according to the Mortgage Bankers Association. There is $3.48 trillion outstanding as of March 31, 2009, down by $33 million, according to MBA's analysis of the Federal Reserve Board Flow of Funds data. Multifamily debt outstanding increased by 0.6% to $908 billion. "Banks, thrifts, Fannie Mae and Freddie Mac all increased their holdings of commercial and multifamily mortgages during the first quarter, while run-off among CMBS and life company loans decreased those investors' holdings," said Jamie Woodwell, MBA's vice president of commercial real estate research. "The relatively long-term nature of commercial real estate finance has meant greater stability in the levels of commercial and multifamily mortgage debt outstanding than is seen among many other types of credit." Commercial banks hold 45% of the total, followed by private label securitization issuers at 21%, life insurers 9% and thrifts 6%. The government sponsored enterprises hold $191 million of multifamily loans to support securities they issued, plus an additional $154 billion of whole loans.

Performance deterioration seen in commercial mortgage-backed securities and multifamily transactions in Europe, the Middle East and Africa during the first quarter is expected to continue, Moody's Investors Service said in a report Wednesday, citing upcoming refinancing risks. "While the refinancing exposure of EMEA CMBS in 2009 and 2010 is still remote, one has to look further ahead," said Deniz Yegenaga, a Moody's associate analyst and co-author of the report. "Given the most recent commercial property market performance and the anticipation of further property value declines, also loans that mature after 2010 will be highly levered on their refinancing date and will most likely experience difficulties to repay. In addition, the significantly declining property values increase the loss upon default of commercial real estate loans." During the first quarter, the number of loans "subject to an event of default" came close to doubling, Moody's said. The rating agency downgraded 13 classes of notes in nine transactions and placed 23 classes of notes in six transactions on review for possible downgrade during the period. It also upgraded three classes of notes in two transactions during the quarter.

The Federal Reserve Bank of New York has chosen commercial real estate information and technology provider Trepp LLC as collateral monitor for commercial mortgage-backed securities as part of the Term Asset-Backed Securities Lending Facility. TALF's monthly subscription window for new issue CMBS was set to open for the first time Tuesday afternoon. At press time midday Tuesday Trepp senior vice president Andy Liebman and Tom Sink said to their knowledge there was nothing pending for it, but they were already at work on aspects of the program that are being finalized, and said next month they anticipate the program will be underway for both new issue and legacy CMBS. Trepp said in its role as monitor it would assist the New York Fed in providing valuation, modeling, analytics and reporting as well as advise on matters involving newly issued and "legacy" CMBS in the program. The New York-based company said it would not establish policies or make decisions for the New York Fed, including decisions on whether to reject a CMBS as collateral for a TALF loan or exclude loans from mortgage pools. Trepp said it would use the analytics and forecasting services of its subcontractor and sister company, the Boston-based Property and Portfolio Research, in conjunction with its work as a TALF CMBS collateral monitor.

Overdues on securities backed by multifamily and retail commercial loans climbed 29 basis points in May to 2.07%, according to Fitch Ratings Agency — the highest percentage of delinquencies since the company created a tracking index back in 2001. Fitch cited "large loan defaults coupled with declining performance on multifamily and retail properties" as a reason for the increase. Even though the late payment rate might appear alarming to some, it is much smaller than the residential delinquency rate, which is in the double-digits. Also, outstanding commercial mortgage debt is much smaller, in terms of dollars, than residential debt. Fitch noted "Defaults on larger loans continue to drive delinquency increases because later vintage transactions have larger loans, many underwritten with now unrealized pro forma income, as well as now-depleted debt service reserves and high leverage."

Commercial/multifamily mortgage origination volumes decreased 65% in 2008 as the number of loans intended for securities fell off sharply. Mortgage bankers closed $181.4 billion in commercial and multifamily loans, according to the Mortgage Bankers Association's 2008 Commercial Real Estate/Multifamily Finance: Annual Origination Volume Summation. The MBA report showed that decreases were seen across all property types and most investor groups. The largest declines were in loans intended for commercial mortgage-backed securities, collateralized debt obligations and other asset-backed security conduits. Intermediated loan volume decreased 68% between 2007 and 2008. "After seeing considerable growth in 2006 and 2007, commercial mortgage originations fell dramatically in 2008," said Jamie Woodwell, MBA's vice president of commercial real estate research. "The continuing credit crunch, a relatively low volume of commercial mortgages maturing in the coming years and little incentive for property owners to sell their properties all continue to put downward pressure on origination volumes." Originations were dominated by multifamily loans, representing $64.6 billion, or 36% of the lending total. Among major investor groups, CMBS, CDO and other ABS conduits saw the greatest percentage decrease in volume between 2007 and 2008, followed by real estate investment trusts, special finance companies and life insurance companies. Lending for hotel/motel properties had the largest decrease in originations by property type, followed closely by office properties.