Construction Loans Get Fitch Criteria

Fitch Ratings has released a formal rating methodology on commercial real estate construction loan pools, declaring itself the first major rating agency to do so.

The analysis of such loans is different from that of conventional loans supporting commercial mortgage-backed securities, said Fitch senior director Joe Kelly.

"CRE construction loans are secured by collateral that is not a finished product," Mr. Kelly said. "The unpredictable nature of a CRE construction project makes the responsibilities and expertise of the sponsor and servicer critical throughout the entire project. A loan's repayment is contingent upon the successful completion of the construction project because the loans do not initially generate sufficient cash flow to cover debt service."

Fitch's CRE construction loan model determines a base default probability and a base loss severity for each loan depending on a project's percentage completion.

Fitch director Richard Carlson said servicing this type of loan "relies upon a different skill set than CMBS servicing" and therefore Fitch-rated CMBS servicers "are not automatically qualified by Fitch to service CRE construction loans."

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