Commercial Mortgage Securitied Market

The commercial debt market has been following housing in many ways. nreionline.com reports on a recent Fitch (rating agency) report:

With 10 business days to go, CMBS issuance is on track to top $200 billion in 2006, a new record. But Fitch Ratings warns a worrisome amount of the loans that were securitized this year are concentrated in volatile property types or are interest-only obligations.

“As issuance volume grows, recent vintages have become more volatile,” Fitch Ratings Senior Director Patty Bach said during a conference call with reporters and analysts on Dec. 13. Bach pointed to a surge in hotel lending, which is regarded as riskier than property types that get their cash flow through long-term leases, not overnight visits.

Hotel loans accounted for 16.3% of all commercial mortgage-backed securities issued in 2006, according to Bach, and for the first time surpassed the multi-family assets in CMBS. The share of hotel properties has been on the rise in CMBS since hitting a post 9/11 low of 2.3%.

Interest-only loans are another red flag, because borrowers who use such instruments may be exceedingly vulnerable to economic downturns. Bach says that Fitch has seen the percentage of interest-only loans in multi-borrower deals rise in 2006 and predicts that the number will rise in 2007, too, although the company does not have precise data on the issue.

Fitch contends riskier lending practices are the result of rising competition among loan originators seeking product and profitability. “Fitch also expects Vintage 2007 to be more volatile than earlier vintages,” Bach says.