After releasing separate loss and default studies previously, Fitch Ratings last week focused on comparing loans that had experienced defaults and losses in terms of property type.

In a press conference held last Tuesday, Fitch analysts discussed the delinquency and loss experience in the multifamily, office, industrial, hotel and healthcare sectors.

The study covers 29,542,000 loans in 200 multi-borrower, fixed-rate, conduit, large loan and fusion CMBS transactions rated by Fitch between 1993 to 2002. Analysts said that that these loan pools represent 72% of the market share of similar deals over that period.

Office and industrial

Losses in the office and industrial sectors are comparatively low to retail and hotel properties, according to one of the key findings of the study. However, Fitch does not expect this trend to continue.

Analysts said that while office loans represent about 21% on a dollar basis of the CMBS collateral used in the study - making it the third largest behind multifamily and retail - this property type experienced the fewest defaults and the lowest loss severity to date.

"Fitch has a guarded outlook on office in the near future," said Mary O'Rourke, senior director at Fitch. She said that they anticipate a considerable rise in both the number of office loans facing default and the size of losses experienced upon dispossession.

She added that the outlook for industrial loans mirrors that for the office sector. However, because industrial properties only make up a relatively small percentage of the CMBS collateral (6.8%) used in the study, the rise of defaults and losses in this sector would probably have less of an impact on CMBS transactions.

Hotel and healthcare

In terms of the hotel sector, Fitch said that 97 defaulted hotel loans with the total collateral balance of $430.7 million have been resolved to date, making it the second largest sector in the default universe on a dollar basis, next to retail.

O'Rourke said although hotel loans make up less than 9% of the CMBS collateral in this loan pool, this area may contribute a larger percentage to the overall CMBS universe when transactions not rated by Fitch are analyzed, since Fitch often does not rate transactions consisting entirely of hotel loans.

For that reason, O'Rourke cautioned against using the results of this loss study without further evaluating the performance of hotel transactions not rated by Fitch.

Similar to the hotel sector, healthcare loans only make up 2.54% of CMBS collateral used in the study. Thus, it is over-represented in terms of the level of losses, as it comprises 6% of total losses. Unlike the hotel sector, however, the continuing decline of healthcare contributions to CMBS will likely lessen the impact on CMBS performance in the long term.

Retail and multifamily

A total of $366.2 million in multifamily loans were resolved in 2002. While the number of resolutions in the retail sector were only slightly less than multifamily properties, the dollar balance of retail resolutions far exceeded the balance of each of the property types.

The retail sector makes up almost 29% of the CMBS universe. It also has a more or less proportional share of the default universe at

28%. However, in terms of losses, the retail sector accounts for more than 48% of CMBS realized losses.

"I don't think the overrepresentation in retail will continue to the extent that it is currently," said O'Rourke. One reason is that the office and industrial sectors will become larger contributors to the loss pool. Aside from this, the rating agency - by

highlighting the overrepresentation of retail loans in the loss universe - showed that several large retail bankruptcies, Kmart in particular, contributed heavily to retail losses. In the absence of a significant amount of similar defaults related to large retailers in the future, Fitch would expect the proportional retail contribution to losses to decline.

O'Rourke pointed out that the participation or contribution of a particular property type to the overall CMBS universe is, in most cases, inconsistent with the contribution it makes to the loss or the default universe. For instance, retail properties comprise about 29% percent of the balance of CMBS loans in this study and the sector also accounts for 28% of defaults as well. However, 48% of the loss universe is in retail - so it is almost double the sector's contribution to defaults.

On the other hand, the multifamily sector, which makes up 24% of the CMBS universe, only comprises about 10% of the loss universe. Also, while office loans make up about 21% of the CMBS universe, this segment only makes up 2% of the losses.

Still positive on CMBS

Though some of the default and delinquency statistics do not look good, this is not an indicator of the shape of the CMBS sector.

For instance, 2003 has brought rising delinquencies, an increase in loans in special servicing and increased defaults and losses. Fitch's loan delinquency index at the end of the second quarter was 1.62%, a 23 basis point increase above the first quarter. The rating agency expects it to increase to 2% by year's end. Fitch also predicted losses for 2003 to reach $400 million.

However, analysts said that these figures should be put in the proper perspective. Only 144 of nearly 30,000 loans have taken losses, through the end of 2002. In dollar terms, this is only $306 million (0.17%) in losses, out of $177.2

billion worth in originations.

"When you start to talk about defaults and losses, it's a little hard not to get a little panicky," said O'Rourke. "However, if you think about the terrifically small percentage of loans that have taken losses in 10 years in these CMBS transactions, it's really quite amazing."

In a related report, RBS Greenwich Capital stated that CMBS fixed-rate conduit/fusion delinquency rate held steady in August. For this month, the delinquency rate was at 2.23% compared with 2.24% the prior month. However, the report stated that despite the level month-over-month reading, delinquencies have increased by more than 27 basis points (which is equal to 14%) on a year-over-year basis.

Delinquent loans reached $4 billion in August, which is just a little bit less than July's $4.03 billion showing. However, this figure is considerably more compared to the year-ago aggregate amount of $3.5 billion. Further, the cumulative loss rate, which was at 0.31% in August, is higher by above 60% compared to a year ago.

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