Rating Agencies See More Pain Ahead for Commercial MBS

As servicers of residential mortgages are experiencing a delay in processing delinquent loans into foreclosure, servicers of commercial mortgage-backed securities (CMBS) are also requiring more time to resolve delinquent loans, according to Fitch Ratings. The delay for servicers, combined with continued market value declines, indicates loss severities are likely to increase “markedly” for US CMBS well into 2010, according to an annual study by the rating agency. Multifamily loans in particular, which represent an average cumulative loss severity of 38.6% in 2008, will see a significant increase in loss severity as many markets suffer rising unemployment and oversupply. Although 78% of commercial mortgage resolutions resulted in no losses to the trust last year, commercial real estate debt capital remains scarce, Fitch noted. Disposition times are likely to increase to between 24 and 36 months as special servicers work through a record backlog of loans, which is up more than 300% since the beginning of the year, Fitch said. “Special  servicers  may have to hold certain properties until liquidity returns  to  the  market,”  said  senior director Britt Johnson. “Though recent  REMIC reforms may help mitigate loss severities, defaulted loans will  take  more  time  to be resolved and losses often will be deferred until maturity.” Adding to the stress in US CMBS is a continued decline in commercial real estate prices. A report by Moody’s Investors Service found commercial property prices continued to decline in August, though at a slower pace than in previous months. The index of all commercial property types measured by Moody’s declined 3% from July after a 5.1% decline from June. The index covered 377 sales in August, slightly recovered from 300 sales in July. “Although prices have declined steadily over the past year, the rate of decline has slowed in recent months after falling by about 8% in both April and May,” said Moody’s managing director Nick Levidy. The continued stress in the commercial real estate sector is playing a significant factor in real estate investment decisions, according to a survey conducted by research and education organization Urban Land Institute (ULI). The commercial real estate market downturn is even outweighing the importance of  climate change and alternative energy sources for financial industry leaders , ULI said in its report on the survey. But investor interest should pick up again when the market rallies. “For now, the global downturn has trumped emerging attempts to realize benefits from green development,” ULI said. “For investors, thinking green today refers to dollars. Environmental issues play a factor only when they produce an immediate return or mitigate an investment risk.” Write to Diana Golobay.