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Rough Outlook for CMBS Servicers

Rough Outlook for CMBS Servicers

Recent MBS ratings activity

January 30, 2008


photo of Coco Salazar
Amid continued downgrading of subprime residential mortgage-backed securities, commercial MBS servicers face a challenging environment as delinquency is expected to double over the next year and the ability to unload assets deteriorates.

A total 58 classes from eight deals issued by CSFB Home Equity Asset Trust in 2004 had ratings lowered based on analysis of current credit enhancement levels provided by excess spread, overcollateralization, and subordinate classes relative to the expected loss, Moody’s Investors Service announced. An increasing rate of severely delinquent loans exists in each transaction.

Other first-lien subprime loan deals that were negatively affected by that same analysis were four deals issued by CWABS Asset-Backed Certificates Trust in 2002 and 2003 that saw 13 certificates downgraded, Moody’s said.

And first-lien subprime transaction ACE Securities Corp. Home Equity Loan Trust, Series 2007-HE5, received a lower rating on Class M-9 because of higher-than-anticipated rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels, as well as methodology updates to non delinquent portions, Moody’s reported.

Three subprime deals closed by Asset Backed Securities Corp. in 2002, 2003, and 2005, saw ratings knocked down on one tranche and placed on negative review for a dozen tranches. Moody’s said the motive behind the actions was due to the tranches’ current credit enhancement levels compared to current projected pool losses.

Meanwhile, Fitch Ratings announced it downgraded the IndyMac Bank FSB’s residential servicer ratings to RPS2 from RPS2+ as a primary servicer of prime, Alt-A and subprime product. Additionally, the bank’s special servicer rating was lowered to RSS2 from RSS2+ and all ratings remain on negative watch. The actions reflect the underlying corporate rating of parent IndyMac Bancorp, as well as continued pressure on financial flexibility and the potential impact on the loan servicing operation, as financial condition represents an important component of Fitch’s servicer rating analysis.

And the capabilities of commercial mortgage-backed securities servicers will not be alien to further scrutiny from Fitch either. For the first time since the birth of the U.S. CMBS market in the early 1990s, CMBS servicer capabilities will undergo rigorous testing this year. This is because this is the first significant capital-markets-driven stress servicers have experienced, Fitch announced.

With currently low delinquencies of 31 basis points expected to double in the next year, Fitch said it will enhance its scrutiny of servicer performance through its surveillance and servicer rating processes. Highly-rated commercial mortgage servicers are expected to be better able to withstand a volatile market, the ratings agency added.

The fourth quarter found investors scrutinizing their structured finance bond portfolios at more intense levels due to the media attention and speculation that erupted when issuance slowed for new deals and virtually came to a stop for commercial real estate collateralized debt obligations. Servicers had to switch focus from managing the flow of new transactions into their portfolios to new challenges and operational risks, including increased inquiries from investors, increased bidding competition, and a potential need of additional or redeployment of staff to address shifting areas of concern.

A positive amid the credit crunch was the decreased number of loans defeasing or pre-paying, which helped master servicing portfolios remain relatively constant as loan inflows and outflows diminished. But master servicers are focusing on the maturity risk associated with the 1998 through 2000 vintages and are managing refinancing challenges in a less liquid market. Plus, special servicers are also facing increasing operational challenges.

“Due to the current liquidity environment, it will no longer be as easy to dispose of real estate owned assets,” Fitch said in the announcement. “Although there is still capital in the real estate market, the profile of the buyers has changed and individual real estate investors are less likely to be able to purchase property because their financing options are limited.” Thus, successful buyers of REO are more likely to be institutional investors or opportunistic real estate funds.

As a result, special servicers could hold assets for longer periods of time, increasing losses to the trust, and will likely see increased loan defaults at maturity if the credit crunch continues for an extended period. Some have already noted a delay in borrower refinance timing. Fitch advised special servicers who closely monitor watch lists with the named master servicers regarding the potential pipeline of specially serviced assets to be better prepared to handle the increased workload.


Coco Salazar is an associate editor and staff writer for

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