RBS analysts see limited risk to CMBS from foreclosure fiasco
The Royal Bank of Scotland doesn't expect issues associated with the foreclosure fiasco to pose a risk to commercial mortgage-backed securities. Analysts said CMBS loan documents include covenants and protective features that mitigate the documentation errors and breaches of representation that are alleged to have occurred within the residential mortgage space. "They were highly negotiated with sophisticated borrowers (often a corporation) including their representative lawyers," the analysts said of commercial real estate loans bundled into CMBS. "The loans were therefore deeply scrutinized helping to ensure that they were properly documented, recorded and the conveyance to the securitization trust was correct." The analysts also said depositors of CMBS are "typically creditworthy institutions with deep pockets" that further offset risk associated with document validity in the event the loans need to be repurchased. On Tuesday, Barclays Capital said CRE may be impacted by potential issues stemming from the Mortgage Electronic Recording System's level of involvement in the foreclosure process. Recent lawsuits question the legal standing of MERS and whether the company can actually execute a foreclosure. Barclays said the lawsuits are creeping from the residential space to loans securing CMBS. Still, analysts expect limited effect to investors, in part because of the lesser number of CRE loans originated and securitized when compares to residential mortgages. "We believe individualized and more highly scrutinized approach to documenting commercial mortgages significantly reduced the risks that led to 'foreclosuregate,'" RBS said. RBS also said the role of the special servicer further enhances the strength of CMBS deals. The special servicer is "specifically responsible for the management, resolution and disposition of nonperforming loans in the trust." Write to Jason Philyaw.