Fitch Ratings this week said it expects 2006 through 2008 vintages of commercial mortgage-backed securities (CMBS) to “substantially underperform” earlier vintages. These vintages are vulnerable to significant performance issues, given their origination at peak market conditions and weaker underwriting standards, the rating agency said in a report this week. The news arrives as the latest indication that the worst of the CMBS fallout is yet to come, as the CMBS market tends to trail behind the residential MBS market in terms of both gains and losses. The rating agency expects to take “substantial rating actions” on these recent vintage transactions, but it still sees senior triple-A classes reasonably safe from downgrades due to the present performance expectations. Commercial mortgages in ’06 through ’08 CMBS vintages were originated near historic peaks. Fitch notes property values fell from their respective peaks by about 23% to date: by 25% on hotel properties, 27% on retail and 23% on multi-family. Cash flows from these vintages suffer as a result. Fitch estimates income on multi-family has fallen 4% from its peak level and projects a 12% decline in the five-year forecast for multi-family. Fitch expects 93% of loans in the ’06 through ’08 vintages are at risk of default; 25% term defaults, 68% maturity defaults and the rest assumed to refinance. “The very high level of maturity defaults results from assuming that income and value declines continue for the life of the transaction,” analysts said in the report. “In Fitch’s view this is a conservative assumption, given the cyclical nature of commercial real estate.” “Predicting the timing and degree of a commercial real estate recovery is speculative,” the analysts added. Write to Diana Golobay. For a detailed look into the current commercial property crisis, please see our feature in the July issue of HousingWire magazine, available now.
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