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Fitch Keeps Negative on CMBS as Losses Continue

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Both recognized and potential losses in commercial mortgage-backed securities (CMBS) are climbing and look unlikely to improve without lasting recovery of the commercial real estate (CRE) market and broader economy, according to Fitch Ratings. The condition of the CRE market looks only worse in light of the effect accounting changes will have on lenders' ability to lend. Fitch noted in recent analysis (download here) that the MLMT Commercial Mortgage Trust (MLMT) 2007-C1 transaction bears higher-than-average recognized and potential losses of 8.3% and 11.4%, respectively. These losses compare with 6.9% recognized and 9.7% potential losses among the rest of the '07 vintage. Of the total transaction pool, about 31% are loans on multifamily properties, while retail properties account for another 30%. Office properties make up 20% of the transaction, while hotels claim another 7%. Self-storage and medical properties both account for 4% of the pool, while mixed-use properties and industrial properties claim the remaining share. Fitch notes that 29% of the transactions' maturities are scheduled to come within the next five years. Fitch downgraded 15 classes of the transaction in August, although outlooks on super-senior classes remain stable. Outlooks on 13 classes remain negative, reflecting the high risk of downgrades in cases where market conditions and loss expectations do not improve as loans move closer to maturity. The spillover of pain from the credit crisis into the commercial real estate industry in the US is also spilling over to CRE firms in the UK. In anticipation of future collapses, some UK CRE firms are writing up living wills that dictate what assets should be sold off to promote long-term stability for the business and shareholders, according to an article this week on the Telegraph. Commercial real estate firms are not the only ones feeling the pain from the credit crisis. CMBS issuers might soon feel an even greater pinch when accounting changes take effect. In the soon-to-be-released January issue of HousingWire magazine incoming president of the Commercial Mortgage Securities Association, Lisa Pendergast, a fixed income managing director of Jefferies Group (JEF), discusses the effect Financial Accounting Standards (FAS) 166 and 167 will have on the CMBS market. The accountancy changes will bring securitized assets onto a firm's balance sheet and pressure capital reserves, which Pendergast says may result in reduced lending activity. Write to Diana Golobay. Disclaimer: The author holds no relevant investment positions.

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