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S&P: CMBS loans originated in 2007 pose high potenial for losses

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Loans underlying commercial mortgage-backed securities originated in 2007 could face the most losses due to weaker underwriting standards, while 2011 originations face fewer risks, according to Standard & Poor's. In a new study, S&P researcher Howard Esaki assesses the risks underlying CMBS originations. To formulate his opinions, he studied a 10-year period, evaluating a dozen key economic indicators, including underwriting guidelines and real estate market conditions at the point of origination. The rating agency concluded the "loss risk level" for CMBS loans originated in 2011 will fall close to 2002 levels because of tighter underwriting conditions at the time of origination. The report estimates cumulative losses of about 2.5% for the 2002 vintage class of CMBS. S&P's risk measuring index currently hangs at 80. A score of 74 indicates a low level of risk, while a score of 133 signifies a high level of potential risk within a CMBS class. "Although the index is at a historically low level (for 2011 originations), both the CMBS underwriting and macroeconomic components have been rising over the past year," the S&P report said. "If current trends continue, we believe the index could rise further this year and approach or surpass the 86 level reached in 2001 and 2004. We estimate cumulative losses of close to 4% for the 2001 CMBS cohort, and about 3.4% for the 2004 CMBS cohort." Even still, 2011 CMBS originations are expected to fare much better than the 2007 group. S&P estimates potential losses of at least 14% for the 2007 class, while losses on 2011 originations could hang around the 2.5% level projected for the similarly situated 2002 period. Write to Kerri Panchuk.

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