Fitch: U.S. CMBS Loss Severities Vary, But Overall Continue To Decline.

CHICAGO -- U.S. commercial property market fundamentals remain strong and are likely to translate to lower loss severities for U.S. CMBS. While overall CMBS Loss severity continued to decline, results varied by resolution type, property type and vintage, according to Fitch Ratings' latest U.S. CMBS loss study.

Loss severities have been trending downward over the past few years from 44.2% in 2002 to 29.6% in 2005. While the number, securitized balance and loss dollars of liquidated loans increased substantially in 2005, loss severities and disposition time were down from 2004 levels. 'The drop in CMBS loss severity and resolution time is due in part to improved real estate fundamentals, but also to the higher concentration of multifamily loans being resolved or liquidated with losses. 'Multifamily loans traditionally have lower average loss severities than other CMBS property types because they are generally less volatile,' said Senior Director Patty Bach.

By resolution type, real estate owned (REO) liquidations generally have the highest loss severity. The 2002-2005 cumulative REO loss severity was 47.6%, significantly higher than the 33.8% cumulative loss severity for all resolution methodologies over the same time period. Loss severity differences by resolution type are even more pronounced for hotel properties. The 2002-2005 cumulative REO loss severity for hotel properties averaged 57.8% compared to a cumulative hotel loss severity of 38.9%. 'If a defaulted loan is more likely to be resolved via REO liquidation than any other method, a higher loss severity should be expected,' stated Bach. Reflecting improving real estate fundamentals, the REO liquidation loss severity in 2005 declined for all property types except for a small uptick in office (24 bps) and healthcare (30 bps).

Although the REO liquidation loss severity fell for most property types, the overall loss severity (including all resolution types) actually increased for multifamily (250 bps), office (170 bps) and hotel properties (1020 bps), while retail (980 bps), healthcare (3680 bps)and other (930 bps)property type loss severity fell in 2005. 'Even though loss severity by property type rose for many CMBS property types, the overall CMBS loss severity fell because of the high concentration of multifamily liquidations in 2005; multifamily properties generally has the lowest loss severity by property type in CMBS.'

Vintage loss severities can fluctuate dramatically year to year due to small sample sizes and a varying liquidation property mix. In 2005, over 89% of loans resolved with losses were securitized in the five vintages ranging from 1997 through 2001. Vintage 1998 through 2001 experienced loss severities in the 24% to 28% range, while vintage 1997 registered a 41.9% loss severity. 'Vintage 1997's high loss severity is attributable to its high concentration of hotel liquidations in 2005 (60% by securitized balance)', said Bach.

'U.S. CMBS Loss Study Update' is available on the Fitch Ratings web site at www.fitchratings.com.

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