CMBS Loan Losses Are Low, But Not for Long

NEW YORK CITY-Of the 248 defaulted commercial loans in CMBS transactions rated by Fitch, only 8 % went through disposition as of the end of last year while 22% returned to current status, according to a new report by the securities rating agency, headquartered here. The firm’s analysis of 19 loans that went through disposition reveals that, on average, 20% of their outstanding principal was lost.

Diane Lans, senior director at the firm, notes that the finding should provide comfort to CMBS investors. “Fitch first found that only 1.02% of CMBS conduit loans defaulted, and further analysis then revealed that the losses related to these defaults were low,” she says in prepared statement. She also warns, however, that the average loss percentage is expected to rise over time as the real estate markets continue to weaken and as more recent defaults are worked out.

In nearly half the cases, defaulted multifamily loans came current or were paid in full, despite the reputation these securities have for high rates of default. “However, almost all the defaulted health care loans–a stunning 91%–are still with the special server and stymied by bankruptcy, have foreclosures pending or are REO and cannot be disposed,” Lans says.

The report, Dissecting Defaults and Losses: Part II: 2001 CMBS Conduit Loan Default Study, stresses that time is most the important factor in affecting the amount of loss. If an asset can be worked out quickly, losses can be reduced. The complete report is available to subscribers at www.fitchratings.com. A conference call will discuss the results of the study on Wednesday Aug. 5 at 2:00 pm Eastern time. Those wishing to participate should call (800) 230-1096 five minute ahead of time and will need to know the name of the call leader, Diane Lans.