CMBS special servicers are working out underperforming mortgages at an increasingly faster pace. However, these companies are still fighting an "uphill battle" this year, Fitch Ratings analysts said in a report released today.

Loans transferring out of special servicing totaled a record $27.9 billion over 3Q10),  which exceeds figures during the last four years combined, the rating agency said. The rate of loans entering special servicing also fell for the first time in more than two years — $90.1 billion through 3Q10 versus $92 billion as of 2Q10.

"Loan modifications continue to dominate as a resolution method," said Stephanie Petosa, managing director at Fitch. "Servicers will resolve loans with increased velocity as liquidity returns to the CMBS market.'

But, the rate of new loans transferring into special servicing remains rapid. The activity in 4Q10 showed a spike. Recent vintages still comprise the biggest volume of transfers, with 2005-2007 vintages representing over 85% of all specially serviced loans by balance.

Also impacting overall loan recovery rates is the extraordinary volume of modified loans returning to master servicing. "There is no guarantee that modifications will result in a full payoff at maturity or end of term," Petosa said. "Recovery rates for loans with losses will also continue to see more instability."

Separately, the rating agency also reported that roughly $22.5 billion worth of commercial mortgages are set to mature over the next 12 months and will need to be rolled over. In total, 22,000 loans will be affected.A majority of the loans — including notes on hotel, office and retail properties — will come due in the latter half of 2011.

Fitch analysts estimated that $16 billion of these credits, or 70%, will pass the refinance test and be renewed.

According to Fitch analysts, $4.5 billion in commercial mortgages will mature this quarter with $4.9 billion coming due in 2Q11. (About $12.9 billion will mature in the second-half.)

"Borrowers of maturing five-year interest-only loans will need to contribute additional equity to reduce debt levels." said Senior Director Adam Fox. "Five-year loans will face more difficulty in refinancing, especially office loans with significant upcoming lease rollover."

The rating agency said more than half of the mortgages ($12 billion) were originated between 2005 and 2007, when real estate values boomed.

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