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

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

The higher CE occurs as the percentage of loans with Fitch-stressed debt service coverage ratios below 1.0x rose to 16.4%, up from just 1.9% Y-O-Y.  Additionally, the percentage of loans with Fitch-stressed loan-to-value ratios above 100% rose by over five percentage points quarter to quarter to 71%. The percentage of full-term IO loans also rose by almost five percentage points last quarter, to 20.5%.

Along the same lines, S&P points to the increasing percentage of IO loans in conduit pools as a spur to overall credit risk. The combined percentages of full (22%) and partial (37%) IO loans were just under 60% in Q2 conduit deals, compared to 55% in Q1 and 50% for full year 2013.

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

Similarly, Fitch last week reported that defeasance among so-called CMBS 2.0 loans is on the rise, with three hailing from 2010 or 2011 among the 26 defeased loans on which it has affirmed ratings year to date. “The sudden appearance of 2.0 requests is the start of an expected increase in defeasance activity as borrowers take advantage of increased property cash flows and reduced coupons that have occurred since the loans were originated early in the CMBS 2.0 cycle,” according to Fitch.

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

“After so many months of steady declines in the delinquency rate, the slowdown in distressed loan liquidations and an uptick in newly 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 or a true shift to slower workout activity from special servicers remains to be seen, but we expect the rate to continue downward.”