Many commercial mortgage-backed securities (CMBS) loans that were originated in 2007 will face a difficult refinance challenge because they were underwritten to pro forma income and have faced significant declines in value, according to data from Fitch Ratings.
Based on Fitch Ratings' surveillance methodology, 80% of all 2007 vintage loans that mature in the next 12 months would be unable to refinance and, thus, face the possibility of default. This compares to 27% for the seasoned 10-year loans originated in 2002.
Under Fitch Ratings' fixed-rate CMBS surveillance methodology, a loan with a debt service coverage ratio (DSCR) below 1.25x would be considered unable to refinance and would default at maturity. This DSCR calculation assumes a refinance interest rate of 8% and a 30-year amortization schedule and is considered a ‘stressed DSCR.’
Fitch Ratings has broken down the number of maturing loans predicted to default at maturity by sector: hotel (60%), office (50%), multifamily (49%) and retail (32%).