NEW YORK CITY—On both new-issue and legacy CMBSloans, the latest reports show a decline in the metrics.Fitch Ratings said last week that leverage andother key metrics for US CMBS slipped again in the second quarter,pushing up credit enhancement levels for new deals, whileStandard & Poor's has expressed concern aboutan increase in the percentage of interest-only loans in conduittransactions. Trepp reported last week that whilethe overall delinquency rate dropped in July, it did so by only onebasis point.

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Average AAA CE for Fitch-rated transactions rose to 24% in Q2,up 1.125 percentage points from Q1 and 2.375 percentage points fromthe year prior. “Fitch has quoted credit enhancement above 25% onseveral deals it ended up not rating, which begs the question ofwhether super senior credit enhancement will soon be poised for amove above 30% if the trend continues,” says managing directorHuxley Somerville. Q2 also saw average BBB- CEincrease by 25 bps quarter over quarter and 100 bps year overyear.

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The higher CE occurs as the percentage of loans withFitch-stressed debt service coverage ratios below 1.0x rose to16.4%, up from just 1.9% Y-O-Y. Additionally, the percentageof loans with Fitch-stressed loan-to-value ratios above 100% roseby over five percentage points quarter to quarter to 71%. Thepercentage of full-term IO loans also rose by almost fivepercentage points last quarter, to 20.5%.

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Along the same lines, S&P points to the increasingpercentage of IO loans in conduit pools as a spur to overall creditrisk. The combined percentages of full (22%) and partial (37%) IOloans were just under 60% in Q2 conduit deals, compared to 55% inQ1 and 50% for full year 2013.

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Other metrics have held steady or improved. S&P reportedthat 87% of maturing loans paid off through June 30, in line withthe agency's initial forecast of over 80% for FY 2014. Among 2007vintage loans, the payoff rate was 78%. “Low long-term interestrates, abundant capital and general improvement in propertyfundamentals continue to drive robust overall payoff rates,”according to James Manzi, senior director ofstructured finance research at S&P.

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Similarly, Fitch last week reported that defeasance amongso-called CMBS 2.0 loans is on the rise, with three hailing from2010 or 2011 among the 26 defeased loans on which it has affirmedratings year to date. “The sudden appearance of 2.0 requests is thestart of an expected increase in defeasance activity as borrowerstake advantage of increased property cash flows and reduced couponsthat have occurred since the loans were originated early in theCMBS 2.0 cycle,” according to Fitch.

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Conversely, however, Trepp found that loan resolutions in Julytotaled only $600 million; the monthly tally this year has rangedas high as $2 billion without factoring in the CWCapital AssetManagement loan sales. The delinquency rate decline of just one bpin July, to 6.04%, was due to fewer distressed loans being removedfrom the delinquent loan pool while newly delinquent loans pushedthe monthly total back up. Trepp currently counts $32.1 billion inCMBS loans as delinquent, down from June's total.

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“After so many months of steady declines in the delinquencyrate, the slowdown in distressed loan liquidations and an uptick innewly delinquent loans put the brakes on the improvement in July,”says Joe McBride, research analyst at Trepp.“Whether the monthly decrease in loan liquidations is an outlier ora true shift to slower workout activity from special servicersremains to be seen, but we expect the rate to continuedownward.”

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.