Existing CMBS’s Late-Pays Increase; New CMBS More Diverse

An increase in monthly commercial mortgage-backed securities delinquencies in Fitch’s latest report adds to evidence suggesting that improvements in late payments seen in October were due primary to the influence of an extraordinary loan resolution.

An 18-basis point increase to 7.96% in November in Fitch’s delinquency index of loans at least 60 days delinquent or in foreclosure follows October's one-time decline driven primarily by the Extended Stay America loan resolution.

According to Fitch, the increase in U.S. CMBS delinquencies in November was largely due to new defaults on office-and retail-backed loans. Of the 10 loans greater than $50 million that became newly delinquent last month, nine corresponded to office or retail properties.

Data providers differ in terms of when they include or exclude loans of unusual size in their numbers. Fitch includes these loans if they are in its rated pools but makes note of their influence if they feel it is significant.

Like some other data providers, Fitch noted that while office and retail had been performing relatively well because of their generally longer-term lease agreements, now that leases are coming up for renewal these property sectors are starting to be marked down to lower market rents.

The economy has been showing some signs of possible recovery that ultimately could be favorable for commercial real estate, including a relatively favorable consumer sentiment report last Friday. But CRE generally lags other sectors of the market in recovering.

In other news, new-issue CMBS still have historically strong credit quality but their diversity has increased since the market essentially restarted midway through 2009, a Moody’s analyst examining a recent $848 million deal being marketed by Goldman Sachs and Citigroup suggest.

The securitization, one of the six nonagency multiborrower CMBS Moody’s has rated this year, bears out what the analyst told this publication has been an increasing trend toward more diversity in deals since the market essentially restarted in mid-2009.

“We expect the trend toward increased diversity [in terms of the number of loans in the deal, for example] will continue going forward,” said Joseph Baksic, a Moody’s senior analyst and vice president.

In addition, the securitization has slightly higher loan-to-value ratios, but Baksic said these are still a far cry from the higher LTVs seen during the market’s peak in 2006 and 2007.

"It's still nowhere near where we were back then,” he said.

The deal, CS Mortgage Securities Trust 2010-C2, has Moody’s highest provisional rating on four of its nine rated tranches. Other tranches’ ratings range from Aa2 to B2, in addition to a typical unrated piece of the deal that provides credit support.

Loans collateralized by retail properties or land improved with retail properties represent 49% of the pool. While Moody’s acknowledged the challenging retail environment in today’s market, it noted that the retail properties collateralizing the loans have experienced low historical net operating income volatility.

Loans collateralized solely or in part by office properties represent 43.1% of the pool and Moody’s cautioned that that property type has experience a high degree of net operating income volatility compared to other CRE sectors.