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CMBS Quality Falls on Recent Vintages

Performance expected to maintain

Dec. 2, 2013

By Mortgage Daily staff

The quality of loans being originated for commercial mortgage-backed securities has been deteriorating, though loan performance is expected to maintain.

Recent commercial real estate loans originated for securitization have seen a deterioration in credit quality, according to a new ratings agency report.

Weaker underwriting standards caused loan-to-value ratios on CMBS loans to increase during 2013 to just 15 percent less than the peak reached in 2007.

Moody's Investors Services, which issued the report, sees credit quality on new transactions in line with that of the 2005 vintage.

In addition, credit quality is expected to decline in 2014 due to increased competition between CMBS loan originators. Debt service coverage ratios are expected to decline as long-term interest rates rise.

The credit quality of 2014 loans is expected to be in line with the 2006 vintage.

But despite the worsening quality, Moody's predicts that CMBS loan performance will maintain as a result of recovering property markets and high DSCRs.

Moody's also warned that lower quality 10-year loans originated in 2006 and 2007 will mature in a higher rate environment during 2016 and 2017 -- creating headwinds for refinancing.

Moody's projects $80 billion in conduit and single-borrower issuance next year. Another $20 billion in issuance is expected for Freddie Mac multifamily loans. Strong issuance is expected early next year as borrowers try to lock in lower interest rates.

"The credit quality and ratings of seasoned CMBS transactions will be stable in 2014," Moody's Vice-President and Senior Credit Officer Keith Banhazl said in the report. "The proportion of delinquent and specially serviced loans will decline in 2014, but remain with a few percentage points of current levels."

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