CMBS Securitizing Riskier Deals?Fitch Ratings
warns that hotel/motel loans and interest-only deals were up this year in the Commercial Mortgage-Backed Securities market.
"As issuance volume grows, recent vintages have become more volatile," Fitch Ratings Senior Director Patty Bach said during a conference call with reporters and analysts on Dec. 13. Bach pointed to a surge in hotel lending, which is regarded as riskier than property types that get their cash flow through long-term leases, not overnight visits.
Hotel loans accounted for 16.3% of all commercial mortgage-backed securities issued in 2006, according to Bach, and for the first time surpassed the multi-family assets in CMBS. The share of hotel properties has been on the rise in CMBS since hitting a post 9/11 low of 2.3%.
Interest-only loans are another red flag, because borrowers who use such instruments may be exceedingly vulnerable to economic downturns. Bach says that Fitch has seen the percentage of interest-only loans in multi-borrower deals rise in 2006 and predicts that the number will rise in 2007, too, although the company does not have precise data on the issue.
Hotels and motels are certainly more sensitive to downturns in the national economy, but the impact of interest-only loans seems a little overblown. If we assume an 80% LTV and a 7.5% interest rate, the LTV five years out is only down to 75% if the value remains steady and the amortization is 30 years.
There is some good news in the report:
Fitch reported an upgrade-to-downgrades ratio of 35.5:1 for multi-borrower CMBS deals through the first nine months of 2006, and 29:1 for large-loan, floating-rate transactions.
Which may explain why we're seeing lower spreads on conduit loans.
