Fitch Warns of Condo, Land Loans in CDOs

As condominium and land loans begin showing up in collateralized debt obligations, investors should exercise caution because of the higher default risk inherent in these loans, according to Fitch Ratings.Fitch said its concerns about condo conversion loans have been magnified by projects that are weakening as speculators -- who helped create an inflated perception of market demand -- exit certain markets. "Many converters are paying substantially more to acquire the properties than their value as multifamily rental properties," said Fitch director David Harrison. "If the converted units cannot be sold quickly, the highly leveraged loans have a greater likelihood of default, since the loan-to-value ratio does not work if the property is re-apartmented." Land loans do not generate cash flow either, and are equally susceptible to market risks, he said. "Land loans and bridge facilities are extremely susceptible to risks related to their zoning and entitlement status, since delays in land zoning and entitlement are typically measured in years, as opposed to months," Mr. Harrison said. Fitch addressed the issues in two recently published criteria reports on commercial real estate CDOs.