Vintage CMBS losses pale in comparison to original estimates: Trepp

The report, which Trepp presented to the Federal Reserve Board of Governors recently, states that the agency now expects only 20 percent of these loans to experience losses, compared to the 50 percent prediction that many institutional lenders and rating agencies had voiced.

Losses from vintage CMBS loans issued between 2006 and 2008 will not be as severe as the financial industry had predicted, according to a new Trepp report presented to the US Federal Reserve’s Board of Governors.

Trepp expects that only 20 percent of the loans will have losses, compared to the upwards of 50 percent prediction that many institutional lenders and other rating agencies had voiced immediately following the last financial crisis.

Manus Clancy, Trepp
Manus Clancy, Trepp

Manus Clancy, senior managing director at Trepp, told Real Estate Capital that the agency expects to see milder losses because of the “enormous amount of liquidity” in the CRE markets today, combined with the recovery of asset prices and a low interest rate environment.

“What we are finding in the last two or three years is that more, rather than fewer, of these loans are able refinance,” he said.

Of the total $356.1 billion in CMBS loans originated in 2006-2008, the agency expects losses to total 14 percent, or $49 billion. To date, there has been $21 billion in principal write-down losses, while the agency projects that there may be another $28 billion.

But the report also warned that despite the positive signs in the refinancing of the loans, the decline in CMBS lending overall may create a situation where banks excessively lend at the peak of the market cycle, repeating the conditions which preceded Savings and Loan Crisis beginning in the late 1980s.

“If banks are taking on more and more commercial real estate debt as CMBS declines, you could create a situation where banks have too much exposure on their books,” said Clancy.

During the first half of this year, CMBS captured just 9 percent of commercial real estate loan originations, according to Real Capital Analytics (RCA), compared to regional banks share of 21 percent and national bank share of 20 percent. That’s a stark decline from 2012, when CMBS lenders had 23 percent of the market.

Banks across the US, particularly regional and local banks, have stated their intentions to ramp up originations to fill a gap in the market left by CMBS, as Real Estate Capital previously reported.

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