CMBS Liquidations: Record Setting July

By Jason Philyaw
Housing Wire
Housing Wire Site
11/11/10
July saw the highest amount of liquidations ever in commercial mortgage-backed securities with more than $1.5 billion of debt affected, and Moody's Investors Service expects continued escalation in monthly liquidations as delinquent loans catch up to loans in special servicing.

Analysts said the average loss severity for all liquidated loans in CMBS rose to 38% in the third quarter, and nearly 500 loans with an average loss severity of 52.6% were liquidated during the period.

In the ratings agency's third-quarter note on CMBS loss severities, analysts said $6.2 billion of debt has been liquidated this year through Sept. 15, which is more than four times higher than $1.3 billion the same period of 2009.

"For the remainder of 2010, we expect continued increases in the share of CMBS loans that are delinquent and/or in special servicing," Moody's said. "Over the next year, we anticipate delinquencies will rise to between 9% and 11% with loans in special servicing at or around the 20% level. Loan defaults are likely to continue past the point when the commercial real estate market bottoms out."

The majority of disposed loans continue to come from the 2006-2008 vintages, and Moody's analysts expect the cumulative loss-severity rate to rise above 38.4%, as more loans from these vintages liquidate at relatively higher loss severities.

Analysts said loss severities can have a significant impact on expected loss ratings. In late September, Moody's said it is reviewing tens of billions of dollars of CMBS for possible downgrades to account for higher losses from troubled loans.

Loans backed by healthcare properties currently have the highest average loss severity at 61%, while office properties have the lowest rate average of 35%, according to Moody's.

"As we move closer to the trough of the real estate cycle, still on a downward valuation slope, loan losses will be greater as loan defaults continue to rise," Moody's said. "After commercial real estate markets bottom out and valuations begin to slope upwards, loan defaults should taper off and for those defaulted loans, smaller severities of loss can be anticipated."