RPT-Fitch: U.S. CMBS Loan Removals Signal Oversight Risk

Tue Dec 3, 2013 8:56am EST

Dec 3 (Reuters) - (The following statement was released by the rating agency)

The removal of loans from two recent CMBS transactions could be an early warning sign of risk for bondholders, Fitch Ratings says. Borrowers' eagerness to lock in historically low interest rates and originators' enthusiasm to maintain volumes are putting pressure on securitizations to come to market quickly, raising the risk of errors in loan oversight.

A $47.5 million loan backed by midwestern shopping centers was removed from GSMS 2013-GCJ16 after the deal priced. The loan was the fifth largest in the pool and was pulled due to concerns over terms of a discounted payoff of a prior financing. Additionally, the ninth largest loan in a mixed-use pool in Chicago was removed from MSBAM 2013-C13 just two days after its launch. Loans are often removed from the pool prior to pricing and the arrangers may have been extra diligent following market concerns over the GCJ16 deal.

In our view, pressure may already be building on originators. U.S. CMBS volumes in 2013 are widely expected to be $87.5 billion by year end, up 81% from 2012's $48.4 billion. The rapid increase in originations raises the question of whether origination teams are vulnerable to losing track of important pieces of information because they are understaffed.

The integrity and thoroughness of the origination process is highly correlated to loan performance. If originators are missing key pieces of relevant information, the process should be slowed down to prevent a drop in the quality of origination. As part of its rating process, Fitch conducts originator and file reviews. If we see further occurrences of these types of issues, deals would attract higher subordination levels.

If origination pressure continues, we would expect other cracks to form. Historically, record loss severities have been realized when new properties drive seemingly stable properties out of business. This situation has occurred when lenders did not have sufficient time or resources to understand the local real estate market, the property's competitive profile, the property's competition or the potential for new competition. For example, two Apple stores recently vacated two high quality CMBS 2.0 properties mid-lease. Apple left both The Palisades Center mall in West Nyack, NY and the Gateway District mall in Salt Lake City, UT for new spaces at nearby competing centers.

New CMBS issuance metrics tracked by Fitch were mixed in the third quarter. Interest rates rose along with Fitch-stressed LTVs and the percentage of IO loans was stable versus the prior quarter (but up from the previous year). The U.S. CMBS delinquency rate plunged last month after a huge loan modification was finalized. CMBS late-pays fell 25 basis points in October to 6.32% from 6.57% a month earlier. The drop was led by a modification of the $678 million Skyline Portfolio loan.

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