Moody's: Interest Shortfalls Pose CMBS Problem

Moody's Investors Service has identified unanticipated interest shortfalls as an emerging problem for the commercial mortgage-backed securities industry.Such shortfalls have led to some downgrades and watchlist placements, and more are expected, according to the rating agency. In CMBS transactions, servicer advances for principal and interest, property protection, and trust expenses help provide liquidity to the securities. Servicers that facilitate this liquidity are reimbursed for the amounts advanced plus interest on a priority basis "at the top of the distribution waterfall." Nicholas Levidy, a Moody's analyst, pointed to a problem posed by this arrangement. "Unfortunately, in some cases where the servicer seeks reimbursement for large advance amounts, the senior certificates have been adversely affected by the advancing mechanism currently found in most CMBS documents," Mr. Levidy said. "By taking the money owed from advances in one payment rather than spreading the payments over a period of time, the shortfall problem is created." A tentative solution proposed by Moody's is to spread the servicer recoveries out, perhaps in combination with "reimbursement of nonrecoverable advances out of general collections of principal." Moody's can be found online at http://www.moodys.com.