Some of the first defaults have emerged on commercial mortgages securitized since the financial crisis, and they are primarily loans on multifamily properties.
Nine loans totaling $74.9 million defaulted last year on CMBS deals issued between 2010 and 2013. Seven loans comprising 76% of total CMBS 2.0 defaults were secured by multifamily properties, according to a Fitch Ratings report.
However the defaults were related to “idiosyncratic events such as tenant bankruptcies or sponsors with financial troubles" and don't signal the start of "prolonged rising defaults,” the report stated.
Three of the loans making up nearly 40% of the total CMBS 2.0 defaults shared the same sponsor. The remaining multifamily defaults occurred on loans which showed adequate property-level performance, but with consistently late with payments, indicating potential financial issues with the sponsors.
"The largest CMBS 2.0 default occurred when a major office tenant vacated before their lease expired,’ Fitch director Brook Sutherland stated in a press release accompanying the report. "The multifamily CMBS defaults were mostly on smaller properties that, despite adequate property performance, were chronically late with payments possibly because of organizational problems at the sponsor level."
Another 12 CMBS loans totaling $157.5 million were transferred to special servicing but did not default.
After the financial crisis, lenders tightened underwriting on commercial mortgages, and this has helped keep defaults on securitizations below pre-crisis levels. According to the report, the average annual default rate for CMBS 2.0 comes in at less than 0.02%. By comparison the average annual default rate for CMBS 1.0, excluding the 20052007 vintages, is approximately 0.7% in the first three years of loan seasoning.
A spike in interest rates remains the biggest risk for CMBS 2.0 vintage, however. “If interest rates are substantially higher when the CMBS loan matures, refinancing is likely to be more difficult unless there is some appreciation in cash flow,” said Sutherland.
In the chart below Fitch lists the loans that defaulted and the securitization conduit pools the loans pertain to.