Rising loan-to-value ratios, credit enhancements and full-term interest-only loans characterize much of the single-borrower issuance in the commercial mortgage-backed securities market, according to Standard & Poor's. Underwriting metrics have become more aggressive.
During the third quarter, two-thirds of the commercial mortgage-backed securities issued were interest-only loans, according to Moody’s Investors Service. These loans have a higher risk of default, analysts say. Meanwhile, Trepp reports that more than $300 billion in conduit CMBS loans will mature in the next three years, which could lead to more defaults of interest-only loans issued from 2006 to 2008.
Standard & Poor's reports that a good portion of CMBS deals done in 2013, namely conduit/fusion transactions, are riskier compared to vintage deals. Underwriting standards are slipping, it said. "Borrowers have increased leverage, riskier interest-only loans have become more prevalent and the percentage of lodging collateral -- which Standard & Poor's considers one of the riskier property types -- is climbing."
Three Wall Street dealers this week are expected to sell $600 million of commercial mortgage-backed securities based on an interest-only, 12-year loan. The transactions reflect the rally in the vehicles that began in mid-2012, which has set the pace for a robust start for issuance in 2013, marked by better terms for borrowers.
The Term Asset-Backed Securities Loan Facility for
consumer loans and legacy CMBS is scheduled to end March 31, and although the Federal Reserve has not announced an official verdict on ending the program, market participants are expecting officials to phase it out. The program's end is raising concern about whether the securitization market backed by consumer loans is strong enough to survive without government support. TALF for new CMBS stays in force until June.