S&P Expects to See Rise in Commercial Delinquencies This Year

A rise in commercial mortgage-backed securities delinquencies is anticipated by Standard & Poor's.

Although commercial mortgage-backed securities have performed well creditwise in the last decade, their performance is tied to the state of the economy.

And the credit rating agency expects a "lagging impact from the anemic economic recovery" to push CMBS delinquencies up.

Even then, "with limited cumulative losses so far, investment-grade CMBS have a comfortable cushion to withstand substantial future losses," according to Dr. Joseph Hu, managing director of research in S&P's structured finance group.

The performance of CMBS in the last 10 years suggests to S&P that "pooled commercial mortgages have been carefully underwritten with unique credit performance characteristics."

Dr. Hu notes, "The credit risk of a commercial mortgage pool is determined by a confluence of micro-economic factors of the local and national economies.

"On the other hand, the strong performance of CMBS can also be attributed to the economic prosperity of the last decade that greatly benefited the market value of commercial real estate properties. Rapidly appreciating property values have limited the frequency of default and the loss severity of liquidated loans."

S&P has reached these conclusions based on a study which looked at the cumulative principal losses and the potential future losses of 237 pools of multiborrower CMBS issued in the U.S. and rated by one or more of the three major U.S. rating agencies between 1994 and mid-2000.

"The miniscule losses that the pools have incurred so far, along with their potentially more significant, but still limited losses in the future, demonstrate the strong credit performance of CMBS," according to S&P.

The study also found, based on a multiple regression analysis, that losses on CMBS pools moved in tandem with pool characteristics such as original loan-to-value ratio, the spread of mortgage note rates over the 10-year Treasury yield, age and the maturity term of the underlying mortgages.

However, features such as debt service coverage ratio and the size of the original pool balance were not significantly related to losses, S&P reports.

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