CMBS Loans in Special Servicing to Hit 15% in 2010: Fitch Report

The value of problem CMBS loans in special servicing will hit $110 billion by the end of the year, Fitch Ratings estimates.

Securitized commercial real estate loans are getting transferred to special servicing at an accelerated pace,  and fully 15 percent of outstanding CMBS will be in special servicing by the end of the year, Fitch Ratings estimates in a report published Wednesday. At that pace, the value of  loans in special servicing will hit $110 billion by the end of the year.  At the same time, big-ticket problem loans are likely to be modified or extended and returned to master servicing.  

During the second half of 2010, loan transfers will continue the momentum established in the first half, Fitch researchers Stephanie Petosa, Scott Pritchard and Richard Carlson. In the first six months of the year, the value of outstanding loan balances jumped by one-quarter to $92 billion.  Imminent default continues to be the most common cause for placing loans in special servicing, accounting for 63 percent of the loans transferred during the first half of the year.  Fitch’s research offered the latest confirmation that securitizations during the peak market years are also most likely to default than earlier vintages. At mid-year, 84 percent of loans in special servicing were securitized during 2005, 2006 or 2007.

The proportion of loans in special servicing shifted considerably among property types during the first half of 2010, mostly because of  two portfolios in particular. In the retail sector, CMBS loans in special servicing dropped from 32 percent of the total at the beginning of 2010 to 20 percent on June 30.  That drop stemmed primarily from the resolution of $7.7 billion in loans by General Growth Properties Inc., which have either returned to master servicing or had their balances reduced to zero.  Meanwhile, the percentage of office CMBS loans in special servicing rose from 17 percent of all loans in special servicing at the start of the year to 30.5 percent at midyear.  The single biggest contributor to that increase was the transfer of $5 billion in loans on Equity Office Properties assets.

Even as the volume of loans sent to special servicing grows, so is the emergence of problem loans out of special servicing. During the first half, loans valued at nearly $20 billion emerged from special servicing—more than double the $8.7 billion that left special servicing during all of 2009. Fitch notes that General Growth Properties alone accounted for 39 percent of all loans transferred out of special servicing.

In one telling finding, the Fitch analysts noted that the balance of loans resolved, or brought to zero, averaged $6.4 million during the first six months of the year. That serves as yet another signal that smaller-balance loans are more likely to be resolved, whether by foreclosure, discounted payoff or note sale.  By contrast, the researchers noted, “larger loans (mostly from recent vintage CMBS) are by and large being modified and/or extended and returned to master servicing.”