CMBS Servicers Hold REO Assets Longer

NEW YORK CITY—Special servicers are keeping REO properties in their inventories for longer periods of time, Fitch Ratings said Monday. In a year-over-year comparison, the ratings agency found that while the pace of CMBS loan resolutions has accelerated, conversely the decrease in REO inventories has leveled off.

Between Dec. 31, 2013 and Dec. 31, 2014, the number of CMBS loans in special servicing declined 21% to 2,264 Fitch-rated loans with a total balance of $38.5 billion. By contrast, the percentage of REO loans in the portfolios of the three largest special servicers—C-III Asset Management LLC, LNR Partners LLC and CWCapital Asset Management LLC—remained basically constant during that time.

In fact, they increased from an average of 45% at year-end '13 to 46% at the end of '14, although LNR's REO uptick was even steeper: from 43% to 53% of its specially serviced inventory. The three servicers account for about 90% of the REO assets in Fitch's study.

Additionally, Fitch notes that servicers in the highest-rated CSS1 peer group saw a substantial increase in REO hold times of over three months compared to year-end 2013. Conversely, REO aging among second-tier special servicers has decreased compared to a year ago. Average months as REO for CSS1 rated servicers increased to 18.9 months at year-end '14 from 15.6 months at year-end '13, while average months as REO decreased to 17.1 months from 17.8 months during the same period for servicers in the CSS2 rating category.

 “The remaining REO assets face market location and asset quality challenges which contribute to the noted aging of REO portfolios,” according to Fitch. Although the aggregate losses of REO liquidations declined to 49% last year from 53% in '13, the ratings agency predicts we'll see an increase in aggregate losses “given the increased aging of remaining REO assets in special servicing.”