CMBS-loan losses decline as economy improves

CMBS Loans Resolved Via Liquidation

By Manus Clancy, senior managing director, Trepp LLC; and Sean Barrie, research analyst, Trepp LLC. | bio

Slightly more than $91 billion in commercial mortgage-backed securities (CMBS) loans over the 14 months ending this past June were paid off — although the paths to resolution have varied.

Persistent low rates and improving property fundamentals have encouraged many borrowers to prepay loans, despite the monetary penalties involved. Nearly $50 billion in CMBS loans fell into the prepay category over the period, as borrowers looked to lock in good rates and take advantage of recovering property values.

Another $22.7 billion were paid on time and some $7 billion were paid post maturity — usually just a few months after the note came due. That leaves $11.3 billion in CMBS loans that took losses at an average rate of 41 percent — amounting to $4.63 billion in losses.

The pool analyzed encompassed U.S. conduit, large-loan and single-asset/borrower CMBS deals. This year marks the beginning of a wall of CMBS maturities, with the total number of loan disposals ticking upward as 2015 has unfolded.

Although a multibillion-dollar loss figure from liquidations is nothing to sneeze at, the big picture for the CMBS market appears to be improving. The average loss severity on liquidated CMBS loans for the 14 months ending this past June is down 6 percentage points, to 41 percent, compared to a prior Trepp loss analysis covering the 14 months ending in March 2014. Part of the improvement is a result of a recovering commercial property market, which has led to better appraisal values that have helped to drive down the severity of loan losses.

For the 14 months ended this past June, the average number of loan liquidations per month clocked in at 83. In the prior three years, the average was 123 loans per month.

A lower monthly liquidation count, coupled with diminishing average losses, is certainly a welcome sight for those looking to refinance CMBS loans. It indicates special servicers overseeing the loan-liquidation process are seeing better performance across all property types.

Through the first eight months of 2015, the 550 CMBS loans that were resolved via liquidation incurred a total realized loss exceeding $2.6 billion. This total yields an average loss rate of 36.57 percent on $7.049 billion worth of loans.

The average loss rate for liquidations through August 2015 has brought down the running average rate — which measures liquidations since January 2010 — to 43.78 percent. This decline is good news for investors, because 2014’s loss rate stood at 49.78 percent.

The loans with the 10-highest loss amounts in 2015, as of August, comprised 21.88 percent of the total realized losses. The 20 highest losses made up 33.87 percent of the total loss amount.

May 2015 was the year’s heftiest month through August for loss severity and loss amount. The average loss rate came in at 46.37 percent — exceeding a total of $580 million in realized losses. January 2015 is the runner-up for total realized losses so far, with over $450 million in liquidations tied to loans resolved in that month. August 2015 had the second-highest average loss rate, at 45.56 percent.

The largest loss amount for a 2015 liquidation as of August belonged to the B note for the Schron Industrial Portfolio. The $85 million chunk of debt backed by 36 industrial properties located throughout Long Island was closed out with a 100 percent loss in April 2015. The second-highest loss for the period is linked to the Genesee Valley Center loan. This Flint, Michigan, mall had its mortgage liquidated in January 2015 at a 67.86 percent loss severity, amounting to $71.3 million in realized losses on its remaining $105.1 million balance.

Other notable CMBS loans taking losses this year were the mortgages backing Regency Square in Richmond, Virginia, and the Radisson Ambassador Plaza Hotel & Casino in San Juan, Puerto Rico. These loans represented 92.9 percent and 91.9 percent of their respective CMBS-deal portfolios at the time of liquidation. Having both loans closed out with loss severities of 94.15 percent and 88.44 percent, respectively, meant many bondholders took a bath when the liquidations became final.

Going forward, 2016 should prove to be a critical year for the CMBS market and the future course of liquidations. That’s when the lion’s share of CMBS loans will begin to mature.

Manus Clancy is senior managing director and the leader of the applied data, research and pricing departments at Trepp LLC. Clancy has been a driving force behind the development of Trepp products and services with over 27 years of experience in modeling structured-finance transactions. Clancy spearheaded the development of Trepp’s commercial mortgage-backed securities research and commentary. Reach Clancy Sean Barrie is a research analyst at Trepp LLC. Barrie handles media outreach as well as inquiries for columns and insight. He is one of the company’s voices to the media on industry topics, news and company updates. Reach Barrie at