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Fitch: CMBS 2.0 Far Healthier Than Volatile 2007 Loans

By NREI Staff
Amid mounting concern that underwriting standards for U.S. commercial mortgage-backed securities (CMBS) are on the decline, Fitch Ratings contends the post-recession crop of conduit loans are still less risky than those securitized in 2007. Many researchers view 2007 as the most volatile year for CMBS.

Some market participants fear that conduit lenders will soon make loans comparable to the worst of the loans made between 2006 and 2008.

While New York-based Fitch agrees that underwriting standards have deteriorated in recent months, that decline is from CMBS lending standards adopted immediately after the last recession.

That period produced some of the most stringent criteria in the sector’s history and is characterized by unusually low-leverage loans, researchers point out.

“It was only a matter of time before CMBS underwriting standards began to decline from such an unusually high level,” says Huxley Somerville, group managing director and head of U.S. CMBS for Fitch.

Fitch researchers say the company’s ratings anticipated a drop in underwriting standards, and already raised credit enhancement levels for new CMBS to ensure ample credit risk protection.

“If CMBS credit metrics begin to drop more precipitously, Fitch will raise credit enhancement levels accordingly,” says Somerville.

Loans in recent CMBS transactions carry stronger non-recourse carve-outs than in years past, according to Fitch. Debt-service coverage ratios, loan-to-value and other metrics from 2010 and 2011 year-to-date are similar to the metrics from 2003 and 2004, Fitch found.

Metrics in the recent loans and those from 2003 and 2004 are substantially more conservative than the 2007 metrics, according to Fitch.

Fitch discusses this trend in greater detail in its latest snapshot on U.S. structured finance, which is available under the latest research tab at
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