Fitch: More IOs & Higher Debt Will Lead to Higher U.S. CMBS Defaults.

CHICAGO -- Loan defaults for U.S. CMBS are likely to begin ticking up as deals issued over the last few years contain larger concentrations of interest-only (IO) loans and loans with a higher amount of debt, according to the latest CMBS loan default study by Fitch Ratings.

Though CMBS loan defaults fell 15% by balance last year to $1.57 billion, cumulative CMBS loan defaults increased to $13 billion (3.29% of Fitch's default study universe). Additionally, the cumulative vintage 10-year average default rate is likely to rise above the current level of 7.88%.

'Loans issued in 2005, 2006 and this year contain more IO loans and loans that have or allow for additional subordinate debt that will be especially sensitive to future market downturns,' said Senior Director Britt Johnson. 'Though CMBS collateral will continue to perform well this year, defaults will begin to increase incrementally beyond 2007 as loans with high loan-to-value ratios continue to be added to new CMBS transactions.'

With 33% of newly defaulted loans last year, multifamily properties continue to have the highest percentage of loan defaults. While overall multifamily defaults have declined from 2005 as properties have benefited from increased interest rates which caused the cost of home ownership to be less attractive, certain markets may continue to suffer higher than historical defaults. 'The increased incidence of incomplete projects and re-conversion to rental properties in the deteriorating South Florida condo market will likely lead to declining rents and increasing vacancies,' said Johnson.

Despite continued short-term improvement, loan defaults are also expected to rise in the office sector, particularly for loans issued this year, as issuers underwrote more aggressive incomes with market rents that were assumed to increase at sometimes unrealistic levels. Retail may also be negatively affected as rising interest rates and the subprime market stress may erode disposable income, while hotel performance will continue to stabilize.

As of year-end 2006, Fitch's CMBS default study universe tracks 318 deals and 48, 647 loans, totaling almost $405 billion. 'U.S. CMBS Loan Default Study 1993-2006' is available on the Fitch Ratings web site at www.fitchratings.com.

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