Morningstar Highlights Pending Increase in Commercial Refinancing



Loans secured by commercial properties in 2009 are coming due for refinancing. A 30-year amortized mortgage for commercial property isn’t actually a 30-year mortgage. Although payments are amortized over 30-years, typically balloon payments come do in 5, 10, 15, or 20 years. Morningstar Credit Ratings, LLC expects $52.42 billion in CMBS loans to mature for the rest of 2016 and another $99.47 billion in 2017, based on the March 2016 remittance data, the most recent available. It will become more difficult for many of these loans to be refinanced because of rosy underwriting assumptions made at issuance.

As the economy has stabilized and nonperforming commercial loans have been cleared off the books, several years of low portfolio volumes as loan delinquencies dropped has resulted special servicers trimming their operations while maintaining their asset-management capabilities. Despite these changes, Morningstar-ranked special servicers, when viewed as a whole, should be suitably positioned, with some no doubt better positioned than others, to handle higher volumes of maturing CMBS loans unable to refinance and retain the necessary internal controls and technology to do so in a sound, risk-averse manner.

Morning Star Credit Ratings

When a loan in a CMBS deal fails to perform as expected, the master servicer sends the loan to a “special servicer”. A special servicer has wide latitude to foreclose on the loan or modify the loan terms in an effort to maximize the cash flows to the CMBS investors.

The 10 most-active special servicers ranked by Morningstar collectively held 8,483 unresolved loans and REO assets as of Dec. 31, 2015, down from 15,454 on Dec. 31, 2013. This development has been the result of delinquency rates falling in the past few years amid positive economic conditions, the corresponding reduction of loans transferred to special servicers, special servicers successfully modifying and liquidating loans and avoiding some foreclosures, and special servicers quickly selling REO assets. The delinquency rate for CMBS loans stood at 2.83%, as of the March remittance period, the latest figures available, down 94 basis points from the year-earlier period, and well off the historical peak of 8.53% set in May 2012. The delinquent balance amounted to $21.96 billion, down from $29.55 billion in the year-earlier period. (For a full copy of the Morningstar report, follow this link: Catch a Wave: Commercial Mortgage Special Servicers Prepared for Maturities.

Despite declines in portfolio volumes and resulting staff reductions, most special servicers ranked by Morningstar have succeeded in retaining the experience levels of their asset-management staff. Many special servicers said that some of the reductions in their special-servicing staff in the past few years involved asset managers transferring to other business lines such as loan-origination and acquisition due diligence, performing-loan surveillance, and borrower consent requests management. This means that previously trained and experienced staff can again be reassigned as special servicers as needed. As a result, many special servicers professed to have contingent asset-management resources beyond what is discernible from their immediate staffing organizational charts.

Additionally, many special servicers have improved processes in multiple ways. Most of the Morningstar-ranked special servicers have maintained or even enhanced their investment in asset-management technology. Additionally, most special servicers ranked have maintained or expanded their internal controls. For instance, many have intensified the level of audit and quality control over their asset-management practices and functions. In many cases, special servicers have added internal risk-management functions to augment third-party or parent company audits. Another area where special servicers have made strides since the Great Recession is managing conflicts of interest. All special servicers ranked by Morningstar strive to provide transparency around how they use affiliates to sell or purchase assets in a securitized pool.

Morningstar concludes special servicers, when viewed as a whole, should be suitably positioned, with some no doubt better positioned than others, to handle higher volumes of maturing CMBS loans unable to refinance and retain the necessary internal controls and technology to do so in a sound, risk-averse manner.

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PhotoAuthor bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.