The credit performance of commercial mortgage-backed securities (CMBS) has been exceptionally strong over the past 10 years, according to a report by Standard & Poor's Ratings Services (S&P). However, the report also said the slow economic recovery will produce escalating delinquencies.
"Nevertheless, going forward it is of comfort to note that with limited cumulative losses so far, investment-grade CMBS have a comfortable cushion to withstand substantial future losses," said Joseph Hu, managing director of research in Structured Finance at S&P's.
The strong credit performance of CMBS indicates that pooled commercial mortgages have been carefully underwritten with unique credit performance characteristics, S&P said.
The report, "Credit Performance of U.S. Commercial Mortgage-Backed Securities," revealed the results of a study that began in September examining cumulative principal losses and the potential future losses of 237 pools of multi-borrower CMBS issued in the United States that were rated by one or more of the three U.S. rating agencies between 1994 and mid-2002, S&P said.
When analyzing the reasons for cumulative losses of pools, the study found the loss to be associated with pool characteristics, such as original loan-to-value, the spread of mortgage note rate over the 10-year Treasury yield, age, and the maturity term of the underlying mortgages. However, other important features, such as debt service coverage ratio and the size of original pool balance, weren't significantly related to losses, the study found.
Hu said the credit risk of a commercial mortgage pool is determined by both micro- and macro economic factors: the viability of the properties and the local and national economies.
"On the other hand, the strong performance of CMBS can also be attributed to the economic prosperity of the past decade that greatly benefited the market value of commercial real estate properties," he said. "Rapidly appreciating property values have limited the frequency of default and the loss of severity of liquidated loans."