CMBS Special Servicing Volume Sees Exponential Growth
The economic crisis has taken a toll on U.S. commercial mortgage backed securities casting $92 billion into special servicing through the second quarter and rising concerns for the market's future performance.
The Fitch CMBS 2Q10 Servicing Update reports that judging from current delinquency trends the specially serviced loan volume is "growing exponentially" and may reach up to 15% of all outstanding CMBS, or a record $110 billion by year-end 2010.
While the prediction to see specialty CMBS surpass the $100 billion mark was previously expected to materialize at the end of 2009, it now seems more realistic than ever.
By the end of the 2Q10 the value of loans in special servicing increased 25% from the $74 billion at the end of 2009, and a drastic 475% compared to the $16 billion reported at yearend 2008.
The increase -which fueled expectations it will cross $100 billion later this year- was not marred by the fact that during the first half of this year over $20 billion in CMBS loans were transferred out of special servicing, up from just under $9 billion during the whole year in 2009.
This year CMBS loans are being transferred out of special servicing "with more frequency" than in 2009, Fitch's managing director Stephanie Petosa told this publication. She finds this increase in loans transferring out of special servicing encouraging since "many loans transferring out of special servicing are now performing."
Yet only if outward fluctuations continue and are larger in size they cannot compensate for the upward trend of CMBS loans in need of special servicing.
Main reasons why the overall volume of transfers in and out of special servicing is high, Petosa explained, is the economic instability, which has turned servicer efforts to keep up with the rapid influx of delinquent loans, into "a real struggle."
While analysts agree that high transfer volatility increases default and redefault risk, what matters the most is the out versus into special servicing ratio and loan size.
There are inherent risks that must be taken into account each time there is a large volume transfer.
Some large size portfolios are significant enough to affect the overall CMBS servicing market, Petosa warns. For example, The Extended Stay Hotel portfolio, GGP portfolio and EOP portfolios do not perform, "are all multi billion dollar portfolios that will impact the market and affect the totals."
Fitch evaluations show that smaller balance loans of anywhere from $1million to $3 million "are being resolved via foreclosure, DPO or note sales."
Larger balance loans of $20 million or above -most of which are from recent vintage CMBS- are instead modified and or extended and returned to master servicing.
As of June 30, 2010, the 2005-2007 vintages accounted for 84% of all specially serviced loans by dollar balance (that also correspond to the years with highest origination levels). Defaults in these vintages are increasing at much higher rates than for pre-2005 originations.
Consequently the CMBS market remains vulnerable to the performance of these modified loans.
Analysts note that only time will tell, "if the modifications will stick."
One possible downturn, Petosa says, is the re-default risk, which "depends on the sustainability of the cash flow and the ability of the borrower to pay under the new terms."
Another development that "has attracted considerable attention among market participants," according to Fitch, because it affects the performance of the CMBS market, is the increase in the number of asset-per-asset-manager cases from 16 at yearend 2009 to 17 during the first half of this year. The change "reflects a disproportionately high ratio of assets" for one manager at special servicer LNR Partners, Inc. averaging 36 assets per asset manager, compared with 14 assets per asset manager at most rated special servicers.