CMBS Loan Transfers: The Beginning of the End or a Temporary Break in the Action?

by Brad Donnell, Senior Director

CMBS loan transfers into special servicing have decreased recently according to Fitch.

In the first quarter of 2010, there were over 630 CMBS loan transfers to special servicing versus only about 200 in the first quarter of 2011.  Annualized, that equates to about half of what was transferred in all of last year and about 37% of what was transferred in 2009.

In January 2010, over 250 CMBS loan transfers to special servicing.  However, since October 2010 the number has not exceeded 78.

The number of specially serviced conduit loans currently stands at 4,656 while the overall CMBS 30+ day delinquency rate increased in February by five basis points to 9.39%

What these statistics seem to point to is that the deals that were destined to fail have failed and we are seeing the beginning of the end of the carnage that began back in 2007.   While this decrease in CMBS loan transfers may bring good news to the market as a whole, there are still perils ahead.

Our observations seem to confirm that smaller balance loans of anywhere from $1million to $3 million that are CMBS loan transfers to special servicing are being resolved more often by discounted payoffs or note sales rather than foreclosures.  Larger balance loans of $20 million or above are instead being modified and or extended and returned to master servicing which is part of the reason why it seems to be difficult for equity investors to source discounted REO assets to purchase.

While modifications have brought temporary stabilization to many assets, the CMBS market remains vulnerable to the performance of these modified loans.  Only time will tell if the modifications will be enough of a band aid to begin the healing process.  There is a fair amount of re-default risk depending on the sustainability of the new cash flows and the ability of the borrower to pay under the new terms.

Modifications often leave Borrowers better off than yesterday, but by no means comfortable.  Like anxious cats in a roomful of rocking chairs, Borrowers today must worry more and more about the ability of their tenants to remain viable businesses capable of servicing these modified loans.  Going back to the servicer for another modification will likely not be a pleasant enterprise.

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