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CMBS Terms Easing

Requirements easing for amortization, reserves

Jan. 31, 2013

By Mortgage Daily staff

Competition is heating up in the market for commercial mortgage-backed securities, leading conduit originators to ease requirements for amortization and reserves.

Credit quality metrics on commercial real estate loans securitized in the fourth-quarter 2012 have returned to 2004 levels.

That leaves the latest vintage favorably positioned compared to issuances from the CMBS market peak reached in 2006 and 2007.

Among the areas to increase in quality were debt-service coverage ratios that exceed 1.60 times.

The DSCR level is at "a high point since the sector revived in 2010" and is a sign that CRE fundamentals are recovering, Moody's Investors Service said in its US CMBS Q4 Review: Conduit Loan Leverage Stable in Second Half 2012, Cautious Credit Outlook for 2013 report.

Another positive for the sector was that fewer conduit loans were backed by poor-quality malls.

Conduit loan leverage held steady at around 100 percent.

Moody's predicts that capitalization rates will rise over the next few years as a result of higher interest rates. But increased interest rates will drive down the historically high DSCRs.

Delinquency of at least 30 days for all CMBS vintages finished 2012 at 7.6 percent, an improvement from 8.15 percent at the end of 2011, based on CMBS rated by Morningstar Credit Ratings LLC.

Stepped-up competition in the CMBS market has Moody's cautious about its outlook for this year.

"Although loan quality is presently at a favorable point in the cycle, we maintain a cautious outlook for conduit credit in 2013," Moody's Director of Commercial Real Estate Research Tad Philipp explained in the report. "There is a high level of competition among conduit loan originators, and borrowers are gaining traction in their quest for higher proceeds and fewer protective features such as amortization and reserves."

The New York-based ratings agency said it doesn't expect CMBS issuers to alter their business models or practices in order to arrest credit deterioration.

In addition, many "sophisticated investors" can't maintain a process for credit discipline because they lack the time needed to analyze and compare transactions.

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