SEP 3, 2013 4:45pm ET

CMBS Quality Softens as Issuance Beats 2012

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The issuance of U.S. commercial mortgage-backed securities has totaled $56 billion so far this year, handily beating the $48 billion place in all 2012, according to Standard & Poor's.

Conduit transactions account for the bulk, about $36 billion of the total.

But growth has come at a price. S&P pointed out that quality metrics—loan-to-value ratios, the share of interest-only loans loans, deal diversity, recourse provisions—have deteriorated since last year.

“Slipping loan standards will translate to higher eventual loss rates for conduit deals issued in 2013 relative to other recent vintages,” the agency said. It added, however, that risks were more contained than in peak issuance years.

The third quarter witnessed a rising share of residential assets in pools as well as an escalating number of B-piece buyers. Also in some ways, collateral quality improved marginally in the third quarter from the second. The percentage of IO loans retreated a bit, though at 50% of pool balance the share remained higher than the one-third posted in 3Q 2012.

Residential assets are accounting for an ever bigger share of pool volumes in CMBS, hitting 20% in 3Q 2013, from 14% in the previous quarter and 10% a year prior. “We expect that multifamily compositions will remain elevated if Freddie Mae and Fannie Mae’s participation rate in the sector continues to decrease, which should increase competition among conduit lenders attempting to gain market share as they try to fill the financing gap.”

A couple of weeks ago, Kroll Bond Rating wrote about how brisk growth in CMBS has gone hand-in-hand this year with falling credit standards.

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