With commercial mortgage-backed securities (CMBS) servicers needing more time to resolve delinquent loans, combined with market value declines, loss severities are expected to rise markedly for U.S. CMBS next year and well into 2010, according to Fitch Ratings in its latest annual U.S. CMBS loss study.
More than three-fourths (78%) of loan resolutions resulted in no losses to the trust last year. But with commercial real estate debt capital remaining scarce, disposition times will increase to between 24 and 36 months, as special servicers are contending with a record backlog of loans (up over 300% since the beginning of this year).
‘Special servicers may have to hold certain properties until liquidity returns to the market,’ says Fitch's senior director, Britt Johnson. ‘Though recent [real estate mortgage investment conduit] reforms may help mitigate loss severities, defaulted loans will take more time to be resolved, and losses often will be deferred until maturity.’
Multifamily loans represented an average cumulative loss severity of 38.6% in 2008. That number is likely to increase, as many markets have seen increasing levels of unemployment and are suffering from oversupply.
Other property types that will see increased loss severities include office (33.3% cumulative average loss in 2008) and hotels (39.5% cumulative average loss last year). It should be noted that property types other than multifamily collectively make up a significantly smaller piece of the CMBS loan universe.
That being said, another area that Fitch is increasingly concerned with of late is hotel loans (39.5% cumulative average loss in 2008).
Additional hotel losses and defaults are likely, as sponsors may deplete reserves or discontinue coming out of pocket to pay debt service on underperforming assets,’ says Johnson.
SOURCE: Fitch Ratings