Bulk sales of distressed CMBS assets by special servicers help drive delinquencies down in the space but may expose senior mezzanine/AJ tranches to losses.
The percentage of REO assets in Fitch Ratings’s delinquency index exceeded 50% for the first time in the index’s history last month. This compares to 37% one year ago.
Fitch said today that these larger REO dispositions are behind the steady improvement in the U.S. CMBS delinquency rate. CMBS late-pays fell 11 basis points in September to 6.57% from 6.68% a month earlier.
The drop was led by the sale of the Granite Run Mall. The Granite Run Mall was previously the fourth largest loan in COMM 2006-C7 and represented 5.5% of the deal.
“CMBS delinquencies will continue to move lower as assets become REO and are disposed of,” said Mary MacNeill, a managing director at Fitch.
But Barclays analysts said in a report today that the trend could expose senior mezzanine/AJ tranches that are cureently receiving interest payments to and immediate loss of credit support.
“A barage of liquidations would wipe out most of their credit support and make several of these tranches close to first loss pieces and expose them to interest shortfalls almost immediately,” explained Barclays. “Front-pay bond would also be negatively affected, as unscheduled liquidation proceeds pay down these premium bonds at par.”
Up next is CW Capital. The special servicer announced plans to sell $2.6 billion of mortgage loans and REO assets in the months ahead and Barclays said that in all the servicer has about $8 billion of CMBS conduit assets currently listed as REO.
CWCapital said that the sale will “likely include a wide range of properties inluding trophy, class B and more distressed smaller assets.”
Fitch said its also expecting the sale of another troubled mall: Gwinnett Place in Duluth, GA. The asset represents the fifth largest in MLMT 2007-C1, comprising roughly 4% of the deal.