KBRA has released a report examining CMBS’s non-performing loans that have experienced heavy losses. The study classifies high-loss loans as having a realized loss greater than or equal to 80% of its securitized balance. The loans were then reviewed by year of securitization, property type, market class, and various metrics to reveal any characteristics common to this group of NPLs. The total of the study population was 10128 loans that were settled with losses, of which 1302 loans (12.9%) were classified as high-loss loans.
Certain themes emerged for these high-loss loans, including their securitization during peak issuance years characterized by poor underwriting, as well as properties that were operating in nature or located in less liquid markets.
More than half (57%) were securitized in the older years 2005-2007, reflecting the relatively weaker underwriting standards of these groups.
In the study, 2011 had the most decisions with high-loss loans (177). The highest loss (25%) occurred in the 2001 resolution amid a recession.
Among the five major property types, housing had 158 high-loss loans with the largest proportion of high-loss loans (15.9%). Holiday Inn-branded properties had the highest loan percentage (29), followed by Best Western (15) and Comfort Inn (9).
A high-loss loan review may provide guidance on how and under what circumstances it might occur. However, while the review has highlighted some characteristics of high-loss loans, the effects of the COVID-19 pandemic have not yet been fully realized and could affect future outcomes.
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KBRA is a full-service credit rating agency registered in the US, EU and UK, designed to provide structured finance ratings in Canada. Investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.