Commercial mortgages bundled into securities will keep seeing their underwriting standards deteriorate from this year into 2016, said JPMorgan analysts in a report today.
But they predict the pace of deterioration will slow down, with pressure from investors deterring lenders from lowering their standards much more.
The rate of declining quality has already slowed down in 2H 2015 compared with 1H.
Judging from various metrics, though, the trend is still in place.
The analysts said that the share of interest-only mortgages in CMBS pools has averaged 67.3% in 2015, up 4.4 percentage points from 62.9% in 2014, according to the analysts. In legacy CMBS, the loss rate has been significantly higher for full-term IO loans than for amortizing loans.
Other metrics have similarly eroded. Loan-to-value (LTV) ratios that are stressed by Moody’s Investors Service and Fitch Ratings, for instance, have averaged 113.8% this year, up 6.1 percentage points from last year. The concentration within deals of hotel properties—a riskier segment—has also gone up.
One of the drivers of looser underwriting has been the entry into the market of small originators vying for riskier borrowers. The JPMorgan analysts estimated that of the 39 unique conduit lenders that sold loans to conduit CMBS deals in 2015, 28 were small originators. This is the largest share of this segment in the past few years.
But investors have been more “vigilant,” demanding higher spreads for deals, even though rating agencies have been requiring more credit enhancement across a good swath of the capital stack.
Projected rise in issuance
The analysts expect private-label CMBS issuance to hit $105 billion-$110 billion in 2016, a 10% rise from this year.
Fueling issuance will be the large stock of legacy deals paying down; the idea is that investors in those maturing CMBS will want new places to put their money to work. But the analysts expect maturities to outpace new issuance, with a projected drop in outstanding supply of $35 billion-$40 billion next year.
