CMBS Defined and Their State of Affairs- By: Jeramie Concklin
Commercial mortgage-backed securities (CMBS) are a class of mortgage securities that are supported by mortgages on commercial properties rather than residential real estate. In layman’s terms, a CMBS Loan is a real estate loan which places commercial mortgages into a trust with other real estate loans and then that trust is sold as bonds to investors.
Banks can select mortgages they hold, categorize them and then bundle them together based on some set criteria. Once they are bundled, the bank sells them as bonds to various mutual funds and trusts. Banks usually book a portion of the sale as profit, and are free to re-invest the balance into the market.
Additionally, as the banks become free of those mortgage liabilities no longer held by the bank (sold off as bonds), they are then positioned to make new loans to other borrowers.
The Current CMBS Crisis
CMBS loans that default are moved from the Master Servicer (master servicer manages payments and information and is responsible for usual interaction with the performing borrower) to the Special Servicer (special servicer handles defaulted loans, and has approval authority over material servicing actions, such as loan assumptions).
Specially serviced U.S. CMBS loans have been increasing since Q4 2011 and are likely to continue rising in 2012, according to Fitch Ratings (a recognized rating agency that provides objective and balanced credit opinions, research and data).
Fitch reports that transfers of over $20 million, has been increasing so far in 2012. A total of 210 loans over $20 million were transferred to special servicers in 2011.
The number of CMBS loans moved to special servicers (by quarter) was:
1Q'11 - 329 CMBS loans, 57 over $20 million
2Q'11 - 292 CMBS loans, 46 over $20 million
3Q'11 - 299 CMBS loans, 42 over $20 million
4Q'11 - 340 CMBS loans, 65 over $20 million
Office space and retail loans led the new transfers in 2011 with 349 and 379 loans respectively. As leases roll and additional retailers consolidate space, it is expected office and retail to make up a larger percentage of newer transfers.
More than $43 billion mortgages packaged and sold as bonds will mature in 2012. The loans, many of which were taken out when property values peaked in 2007, will face even higher refinancing rates than those CMBS mortgages that came due in 2011 amid tighter lending standards. In all likelihood, the delinquency rate is expected to rise in coming months as the 2007 loans were originated under the weakest underwriting standards.
With the first of the dreaded 2007 vintage loans starting to mature, severe upward pressure will be put on the rate over the next few months. Even if the 2007 loans are only ‘as bad’ as the 2006 vintage has been, the rate could go by 75 basis points.
Meanwhile, according to Citigroup Inc., sales of bonds for commercial mortgages will probably fall 11 percent to about $25 billion in 2012 because of fluctuations influenced by Europe's growing debt crisis and tighter creditor standards. Analysts indicated that sales of the bonds, connected to everything from skyscrapers to strip malls, may be as low as $20 billion this year if the U.S. economy slows.
Additional data to consider when evaluating the state of CMBS now and into the future is from Moody’s (Moody’s provides international financial research on bonds issued by commercial and government entities). They warn that even though low interest rates are currently acting as a positive influence, especially for five-year maturity loans which originated at the market’s peak, current volatility in the credit markets can reduce liquidity, making the outlook for 2016 and 2017, when the ten-year loans originated during the peak 2006 and 2007 mature, increasingly more negative.
It is also expected the proportion of specially serviced and delinquent CMBS loans to remain within a few percentage points of their respective current levels of 12.1% and 9.3% during 2012, and notes that the current delinquency rate is near the high-water mark expected for this cycle.
Office and retail, the largest sectors by share of total CMBS outstanding, both recorded higher delinquency rates in December 2011. Office delinquencies increased by 26 basis points to 8.65 percent, while retail delinquencies increased 25 basis points to 7.22 percent.
The industrial sector recorded the largest increase in delinquencies, with its rate rising 59 basis points to 12.09 percent – the highest delinquency rate reported for the sector to date.
By state, Nevada continues to have the highest delinquency rate, at around 20 percent.
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Author Resource :
Jeramie Concklin, CEO – Alliance Commercial Group: As Chief Executive Officer of Alliance Commercial Group my role is multi faceted. As the leader in this company it is my responsibility to establish the realistic, yet high, objectives that we strive for. I focus on setting the organization's objectives and ensuring that those objectives are clearly understood by the staff. I set the direction for the attainment of these objectives and motivate the staff to meet those objectives through leading by example. My outside activities include speaking publicly to commercial property owners, brokers and bankers at various industry events about effective restructuring of securitized commercial property debt.