Analyzing non-performing and sub-performing commercial real estate securitizations in Japan requires a different methodology than that developed by Fitch IBCA to analyze such assets in the U.S. and in Europe. In the face of the deterioration of Japanese commercial and residential real estate following the burst of the bubble economy, Fitch IBCA believes that financial institutions and other owners of non-performing real estate loans (NPLs) will increasingly turn to securitization to rid balance sheets of mispriced assets. Securitizations of NPLs can be done either by the loan originator or the purchaser of these loans.
Unlike the U.S., a substantial amount of NPLs in Japan may provide no cashflows. Therefore, investors rely primarily on the asset resolution process to be paid interest and repaid principal. In cases where there is evidence of sustainable cashflows, certain credit is given for such cashflows whilst considering various related risks.