to special servicing, says Fitch.
NEW YORK CITY-The volume of CMBS loans in special servicing fell $5.8 billion to $74.8 billion at the end of the third quarter, Fitch Ratings said Monday. That’s the steepest quarterly decline since 2010, when the volume of specially serviced CMBS reached $91.7 billion.
Fitch chalks it up to both “a significant drop” in the number of loans being transferred into special servicing and a large number of loans either being liquidated or returning to performing status. The quarterly volume was $5.5 billion in newly transferred loans, compared to a previous quarterly average of $11.8 billion
Also down since that time is the average number of assets per asset manager. Two years ago, it was as high as 50 per manager for one special servicer; today’s it’s declined to 12 from 20 about a year ago, according to Fitch.
The Fitch data dovetail with a report from Trepp noting that the volume of CMBS loans liquidated during November was up sharply from the previous month. It reached $1.78 billion last month, up more than $400 million from October and well above the 12-month moving average of $1.37 billion. Similarly, Trepp noted that the number of loans liquidated during the month—159—was higher than the 12-month moving average of 141. The average size of liquidated loans in November was also up slightly to $11.18 million from October’s $10.99 million and significantly above the 12-month average of $9.73 million.
‘The backlog of underperforming CMBS loans is still formidable,” Fitch managing director Stephanie Petosa says in a statement. “But servicers are gradually seeing fewer loans to work out and increased refinancing opportunities, which bodes well headed into next year.”
However, Fitch adds that while the overall trend appears positive, there are still risks. Keeping the volume down may be difficult in the long run when the balance in special servicing remains high and a large number of maturities are due between 2015 and 2017. How these maturities play out is “difficult to predict amid uncertain interest rate trends and the current delicate recovery in the business cycle,” according to Fitch.
Further, a note following up the firm’s initial report says that Fitch believes the “relative scarcity” of specially serviced loans is increasing competition between servicers “and may make the conflicts of interest that they must manage more important. Investors are concerned that the special servicer agrees to resolution terms that are in their own best interest (or that of a related entity or brokerage), rather than protecting the interests of all bondholders. Increased competition for troubled assets, either for fee generation or ultimate control of the real estate, will further intensify investor concern as special servicers compete for controlling classholder rights.”
Fitch’s latest Commercial Mortgage Market Index notes that paid-in-full has replaced note sales as the most frequently deployed resolution type this year; the format ranked third last year. In 2011, note sales and foreclosures were the most frequently used methods to liquidate defaulted loans, Fitch states.