Fitch Reviews U.S. Small-Balance CMBS Sector
Fitch Ratings has taken various rating actions on 261 classes in 30 small-balance commercial transactions. The transactions reviewed were issued between 2003 and 2008 with collateral consisting of fixed- and adjustable-rate mortgage loans secured by senior liens on commercial, multifamily and mixed-use properties and unimproved land.
A spreadsheet detailing Fitch's rating actions on the affected transactions can be found using the web link below for 'U.S. Small-Balance CMBS Rating Actions for Nov. 6, 2012'.
A summary of the rating actions:
--172 classes affirmed;
--89 classes downgraded.
The majority of the classes downgraded held a non-investment grade or distressed rating prior to the review and, of classes with a Rating Outlook, close to 100% of the classes downgraded were on Outlook Negative prior to the review. The majority of the rating revisions were one category.
Collateral performance deteriorated modestly over the past year with delinquency increasing on average from 22% to 25% and with realized losses to date increasing on average from 9% to 12% as a percentage of the original pool balances. A high percentage of the remaining loans have been modified. For mortgage pools with modification data available, close to 50% of the remaining loans have been modified.
To determine the base-case default projections for the mortgage pools, Fitch used the vintage average default assumptions for the Alt-A RMBS sector due to similarities in credit profiles and delinquency to-date. The default expectations were adjusted for each pool's delinquency distribution and performance. The loss-severity assumptions reflected actual severities of loans that were liquidated over the past 12 months. Losses were stressed in rating-stress scenarios using multiples consistent with those generated by the Alt-A loss model. After determining each underlying pool's projected base-case and stressed scenario mortgage loss assumptions, Fitch performed cash flow analysis to determine the risk of principal loss or interest shortfall for each class.
The default assumptions for small-balance commercial mortgages were affected by recent enhancements to the base-case and stress-scenario default assumptions for the Alt-A RMBS sector. The revisions better reflect recent trends of borrowers with negative equity and establish more consistency with the rating methodology for new-issue transactions. On average, the revisions resulted in higher loss expectations, particularly in the stress-scenarios. Additionally, Fitch has increased its cash flow stresses for servicer advancing, interest-rates and for mortgage pool weighted-average-coupon reductions due to modifications.
The more conservative stress methodology, combined with the modest performance deterioration of the collateral, drove the rating downgrades.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'U.S. RMBS Surveillance Criteria' (Oct. 11, 2012);
--'U.S. Residential Mortgage Re-REMIC Criteria' (Aug. 10, 2012);
--'U.S. RMBS Loan Loss Model Criteria' (Aug. 10, 2012);
--'Criteria for Rating Caps in Global Structured Finance Transactions' (Aug. 2, 2012);
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012);
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 18, 2011);
--'Fitch Reviews U.S. Alt-A RMBS Sector' (June 6, 2012).
Applicable Criteria and Related Research: U.S. Small-Balance CMBS Rating
Actions for Nov. 6, 2012
U.S. RMBS Surveillance Criteria
U.S. Residential Mortgage Re-REMIC Criteria
U.S. RMBS Loan Loss Model Criteria
Criteria for Rating Caps in Global Structured Finance Transactions
Global Structured Finance Rating Criteria
Counterparty Criteria for Structured Finance Transactions
Criteria for Interest Rate Stresses in Structured Finance Transactions
Structured Finance Recovery Estimates for Distressed Securities