Fitch Ratings is poised to increase the amount of investor protection in commercial-mortgage backed securities deals as lending standards deteriorate.
The ratings company will require underwriters to boost the buffer that protects bondholders from losses if higher interest rates make it harder for landlords to pay off debt, Fitch said in a report today. Moody’s Investors Service said it was taking a similar step in October.
Concern is mounting that lenders are lowering the bar as sales of securities linked to everything from strip malls to skyscrapers are forecast to surpass $100 billion this year after doubling to $80 billion in 2013, according to data compiled by Bloomberg. One troubling trend is the increase in loans that delay principal payments, making it harder to refinance when the loan comes due, according to Fitch.
“The logic of removing a strong mitigant to CMBS refinance risk in a higher rate world is questionable at best,” Fitch analyst Huxley Somerville wrote in the report.
More than half of mortgages contained in bonds sold in 2013 require no principal payments for at least part of a loan’s term, according to Fitch.
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