Credit enhancements for commercial mortgage-backed securities (CMBS) are on the rise, Fitch Ratings reports. The agency has raised its credit-enhancement levels to reflect the increased leverage.
Today's credit enhancement levels have moved from 15% at AAA in the first conduit deal to an average of between 17% and 19% this year.
‘The first transactions to emerge from CMBS 2.0 were very conservative in most facets, befitting an industry emerging from a very stressful period,’ says Huxley Somerville, group managing director and head of U.S. CMBS for Fitch. ‘However, standards, not surprisingly, are beginning to loosen as competition amongst originators intensifies and the economy continues to rebound.’
As far as the prospect of credit enhancement increasing more rapidly over time, Fitch says this is highly unlikely to occur for a few reasons.
‘The change in loan attributes over the past year has been from very conservative to more traditional and still relatively benign attributes,’ says Somerville. Also, ‘the CMBS market is likely to balk at greatly further loosening of underwriting standards, since future deals would become increasingly uneconomic.’
SOURCE: Fitch Ratings
