Analysts at the Royal Bank of Scotland (RBS)
looked at 155 loans tied in commercial mortgage-backed securities and found 44% ended up redefaulting, even after modification.
After the financial meltdown in 2008, CMBS rebounded much faster than residential mortgage-backed securities deals. Jones Lang LaSalle
analysts estimate CMBS issuance to top $40 billion
in 2011, while only a handful of RMBS deals are planned. Watching how vintage loans behave after modification should give implications for how and when to modify new ones if similar economic trouble appears and what kind of loss severity to expect.
Most of the loans RBS studied were modified in 2010. Because it takes roughly two years before a modified loan redefaults, the next year could be very telling for how high the loss severity on these loans could go, analysts said.
RBS analysts found that 87 of the loans, totaling $944 million, redefaulted at an average loss of 23%. But this was actually a lower loss severity than loans where no modifications were made.
"By comparison, we find average loss severities across all CMBS conduit loans to be in excess of 50%," analysts said.
Of the loans originated in 1997, were modified and later redefaulted, loss severities reached 70.8%, the highest of any group of loans studied. Loss severities also spiked at 36% for 2001, 40% for 2006 and 37% for 2007 vintages.
Loans originated in 2004 and 2005 were the most likely to be modified. Nearly one-third of all modifications were either given a payment change or had the maturity date extended.
"As a modified loan seasons, it is more likely to be voluntarily paid-off," analysts said. "We find earlier vintages and smaller balance loans tend to remain outstanding for longer periods of time."
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