Fitch sees more CMBS 2.0 risk with higher LTVs
Fitch Ratings in July will tighten its ratings methodology for commercial mortgages pooled into securities for the secondary market. Among the changes, it is anticipated Fitch analysts will apply an increased probability of loss on debt with higher loan-to-value ratios. The stricter risk ratings will only be applied to so-called CMBS 2.0, transactions issued after 2008. Critics argue the CMBS market is relatively active compared to private-label residential mortgage-backed securities, yet underwriting standards on CMBS 2.0 is slipping as more competition enters the space and deal flow continues to grow. The changes are also applicable only to transactions with several borrowers involved. Fitch is seeking to offer more transparency in its ratings methodology, the agency said. A report accompanying the changes also will provide more clarity on the decision. Macroeconomic conditions will play a larger role in ratings, as will property level cash flows. For example, Fitch will begin to measure the impact of CMBS structures that feature the removal of credit for springing lockboxes. Lockboxes are a capital management tool and, in this case, capital "springs open" in the event of a default. CMBS rated before 2009 will not be impacted by the changes. Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.