The long-feared risk of securities backed by loosely underwritten commercial mortgages going bad en masse as they matured has been side-stepped due in part to modifications. But as a Fitch report highlighted last week, there continue to be some smaller, hidden risks in modified loans when it comes to their collateral properties’ financials.
Transparency in
Fitch found in a random review of information on corrected, securitized mortgages and from data provider Trepp that disclosure has improved. Special servicers have been better about including more detailed modification terms in loan comment fields that are sufficient for investors’ modeling purposes, according to Fitch.
However, Fitch Ratings also found that the financial reporting on underlying properties needed to complete the picture remained lacking in more than half the loans it sampled.
“Detailed disclosure of the modification terms is of primary importance. However, the absence of reported financial statements challenges investors’ ability to assess the health of the property and calls into question the basis for a modification,” the report noted.
“While the disclosure of loan modification terms has increased significantly over the last two years, the reporting of delinquent historical operating statements is still lacking,” Adam Fox, a senior director at Fitch, said in response to questions from this publication about the time span and scope of the improvement and the extent of the remaining shortfall in information.
“We are, however, encouraged by the efforts of special servicers to improve the reporting,” he added.
Interestingly, the remaining problem turns out not to be so much that the missing data have not been available as it has not gotten into the right hands.
Fitch found out from senior management that in many cases special servicers had the information but just had not passed it on to the master servicers.
There also were cases where the special servicer did provide the information to a contact at the master servicer, but not directly to a contact that was responsible for financial statement analysis and reporting.
The report indicates servicers are responding to the concern by instituting new policies and procedures for reporting financial statements to the master servicer, and Fitch believes that “in all instances where a loan is being returned to the master servicer as a corrected loan (with the same borrower), the master servicer should receive and report current and delinquent financial statements as a requirement for accepting the loan as a corrected mortgage loan.”
When asked if there is a formal rating effect or policy related to this concern, Fox said, “Given this is a broad industry issue, we have not made any specific criteria changes related to disclosure of modified loans.
“Our criteria, however, does address the quality and timeliness of information disclosed by special servicer for all loans,” he added.
