CMBS Defeasance Improves, Still Below 2007 Level

Year-over-year defeasance of loans in commercial mortgage-backed securities increased significantly in 2012 reaching to its highest level since the eruption of the housing crisis in 2007, according to a report from Moody’s Investors Service.

“Rise in liquidity options, a low-interest-rate environment and continued improvement in real estate fundamentals” were the main factors that helped increase defeasance of CMBS loans to $5.9 billion, up 21% from $4.9 billion in 2011.

Defeasance, explains Moody’s VP and senior credit officer, and co-author of the report, Sandra Ruffin, “dramatically reduces the risk of potential loss of principal and interest” in CMBS asset pools by substituting Aaa-rated U.S. government securities with real estate collateral.

The “U.S. CMBS: Defeasance Continues Upward Trend Due to Favorable Market Conditions" report also found that despite reported improvements “defeasance activity in recent years is far below the former high levels of 2005-2007."

Meanwhile, Ruffin said, new CMBS issuance and insurance company lending also have picked up steam making available additional commercial real estate financing.

The largest shares of defeased loans, by property type were topped by retail properties at 30%, office with 26% and multifamily 17%.

By balance, the largest transactions were secured by five super regional malls, which consisted of over a third of the retail loans that defeased in 2012.