Feature: Loan Changes in U.S. CMBS

By Keith Loria, Contributing Editor: What does an increase in dropped loans from new U.S. CMBS pre-securitization mean for the rating agencies' review process in 2016?
Stephanie Petosa

Stephanie Petosa, Managing Director, Fitch Ratings

Fitch Ratings, in its latest weekly U.S. CMBS newsletter, reveals that loans are being dropped from new U.S. CMBS pre-securitization at an increased rate. According to the report, loan changes in U.S. CMBS deals are not only taking place after a deal closes but before it securitizes, as well.

“Fitch is seeing an increasing number of loan changes between the initial data tape and final tape,” Stephanie Petosa, Fitch Ratings’ managing director, said in the report. “While it is not unusual for a pool to change from initial proposal to final pool cut, Fitch notes that the number of iterations have increased materially over the past 12 months.”

In a sample of 28 Fitch-rated deals for the 12-month period ending June 30, 2015, the rating agency looked at nearly 1,000 loans that were dropped, representing approximately 30 percent of the final transaction amount. The majority of these “dropped loans” were under $20 million.

“Larger loans that drop from pools will have a more significant impact on the overall deal metrics, including Fitch loan loss estimates that drive credit enhancement,” the report noted. “That means pools experiencing a sizable number of large loan drops may have significantly different credit characteristics and, as such, credit enhancement between Fitch’s initial feedback and when expected ratings are published.”

The report explains that it is not unusual for loans to be dropped from a pool, citing several rationales: A property may experience last-minute changes to its tenancy, including the borrowers not securing signed leases in time; competition from other lenders providing more favorable loan terms; or simply a need to reshape the loan pool to provide better property, geographic and originator diversity.

“Often a loan is dropped from one pool, only to reappear in a subsequent pool as the cause for the delay is remedied,” Petosa said. “However, Fitch is concerned that the numerous loan drops could indicate a lack of lender due diligence prior to sending the initial loan information to rating agencies and/or B-piece buyers.”

Additionally, there seems to be anecdotal talk that some originators may be using B-piece buyers and rating agencies as initial providers of credit feedback; less favorable feedback indicates to the potential originator that it’s not worth proceeding with the loan process.

Therefore, as part of its originator reviews in 2016, Fitch will be asking originators for the depth of their due diligence efforts for loans that appear on the initial tape, accompanied by a one-page asset summary.