Although post-crisis commercial mortgage-backed securities performance is
“Interest shortfalls are now beginning to surface in 2.0 transactions though nearly all of these loans continue to perform,” Fitch analysts said in a report Monday.
“All classes in a CMBS capital stack can be affected by interest shortfalls, though it is usually concentrated pools that are most vulnerable to a significant impact,” said Fitch senior director Britt Johnson in a press release.
Interest shortfalls, which are—in their simplest form—when a CMBS bond is not paid the full amount of interest due, are very common in legacy, pre-crisis CMBS, according to Fitch. The company finds that nearly 90% of these bonds have outstanding interest shortfalls in one or more rated classes.
Johnson said common causes of interest shortfalls are appraisal reductions, special servicing fees, loan modifications or when a servicer stops advancing or recoups prior advances.
“There are often large spikes in interest shortfalls when a servicer stops advancing or recoups prior advances, which can cause shortfalls to climb quickly up the capital stack in a given month,” said Johnson.
In most CMBS issued post-2004, “This is the case when principal collections are insufficient to cover a servicer’s advance requirements,” according to Fitch.
