NEW YORK CITY-The default rate on vintage CMBS may have reached an all-time record level in December of last year, but without special servicers stepping up the pace on loan modifications, it could have been much worse. That’s one of the key points in a report issued earlier this week by Standard & Poor’s Ratings Services.

“Our view is that extending maturities for loans with stable cash flows has helped keep trust expenses down and has prevented higher losses typically associated with property liquidations at distressed prices,” writes credit analyst Larry Kay in the S&P report, titled “US CMBS Loan Modifications Reached An All-Time High In 2010.” He adds that the S&P team believes that loan extensions, the most common type of modification, “have relieved some of the stress in the property markets over the past few years.” Although S&P believes the number of modifications will remain high in 2011, it also expects liquidations to increase as a percentage of total resolutions as market conditions improve.

The report notes that 354 loans with a principal balance of $15.6 billion were modified during the first 11 months of last year. That’s well above the 216 loans with a principal balance of $7.06 billion that were modified in all of 2009. Ninety-six percent of all the loan modifications since 2000 occurred during this 23-month period, according to S&P.

Loan modifications can help special servicers avoid having to work out or liquidate a loan in a stressed commercial real estate market, the report notes. They can also provide borrowers with potential workout options, thus limiting the number of new defaults.

S&P says the most commonly modified loans are backed by retail properties, representing 49.3% of total modifications by principal balance. However, when loans from the General Growth Properties portfolio are taken out of the equation, retail’s share drops by more than half to 22.6% and office takes first place with 30.8% of modifications by principal balance. Loans backed by lodging properties are the next most common at 19.3%, followed by multifamily with 16.9%.

Similarly, retail has the highest modification rate—i.e. percentage of retail modifications relative to retail’s outstanding balance—at 7%, but that drops to 2.1% if GGP is excluded. That leaves the lodging sector with the highest percentage of modifications at 5.6%.

“In our view, properties in the lodging sector, which was one of the hardest hit in the last recession”—the sector’s CMBS delinquency rate ranked second at 14.31% in December, according to Trepp data—“could be among the first to reap the most benefits from modifications,” according to S&P’s report. “With lodging property fundamentals rapidly improving, we think that higher liquidation values may be more likely during the post-modification era.”

While 2000-vintage CMBS has the highest modification rate of any vintage at 9%, as well as the highest delinquency rate at 36.9%, 2007 accounts for 29% of modified loans by principal balance, along with nearly one-third of total CMBS outstanding. “As five-year term loans from the 2006 and 2007 vintage years mature in 2011 and 2012, respectively, we expect the percentage of modified loans to the outstanding balance of these two vintage years to increase substantially,” S&P says.