Fitch Responds to Investor Concerns of U.S. CMBS Loans Modified In a Vacuum

NEW YORK--()--The rising volume of loan modifications over the past two years, especially for the largest U.S. CMBS loans, is making investors increasingly vocal that additional information is needed to assess the modification's impact on their investment, according to Fitch Ratings.

Detailed disclosure of the modification terms is of primary importance. However, the absence of reported financial statements challenges investors' ability to assess the health of the property and calls into question the basis for a modification. To address these concerns, Fitch focused on modification disclosure during its 2012 review of special and master servicers.

During its servicer review process, Fitch reviewed the adequacy of information reported by special servicers on loans that have been returned to the master servicer as corrected mortgage loans. Fitch selected modified loans at random using information provided by special servicers and information from Trepp. This was done to assess the availability and adequacy of information on the new loan terms, as well as if financial information was appropriately disclosed.

Fitch observed a marked improvement in 2012 of special servicer's disclosure of modified loan terms. Fitch also noted that special servicers increasingly made use of loan comment fields to communicate modification terms, and that the terms of the modification were more detailed and sufficient for investors to model modified terms of the loan.

While Fitch observed improved disclosure of modification terms, financial reporting of the underlying properties has not followed suit. Fitch found more than 50% of the loans it sampled did not have properly reported current or historical financial statements.

Fitch discussed these loans with management and requested copies of business plans to assess if financial statements had been obtained. In all instances Fitch found that special servicers had in fact collected current and historical financial statements and were documented in their business plans. This trend was observed among nearly all Fitch rated servicers. The only consistent difference observed was when the same servicer acted as both master and special servicer.

In discussions with senior management, Fitch found that the lack of financial statement reporting was typically the result of a breakdown in communication between master and special servicers. Generally, asset managers either neglected to forward the financial statements to the master servicer to be reported, or the statements were sent to a master servicer contact that was not responsible for financial statement analysis and reporting.

The response from special servicers to the lack of disclosure highlighted by Fitch has been proactive. Many servicers have instituted new policies and procedures for reporting financial statements to the master servicer. Fitch will continue to monitor the disclosure of financial statements for modified loans in 2013 turning its attention to master servicers. It is Fitch's view that in all instances where a loan is being returned to the master servicer as a corrected loan (with the same borrower), the master servicer should receive and report current and delinquent financial statements as a requirement for accepting the loan as a corrected mortgage loan.

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings
Adam Fox
Senior Director
+1-212-908-0869
Fitch Ratings, Inc., One State Street Plaza, New York, NY 10004
or
Dan Chambers
Managing Director
+1-212-908-0782
or
Howard Miller
Director
+1-212-908-0737
or
James Bauer
Associate Director
+1-212-908-0343
or
Media Relations
Sandro Scenga
+1-212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Adam Fox
Senior Director
+1-212-908-0869
Fitch Ratings, Inc., One State Street Plaza, New York, NY 10004
or
Dan Chambers
Managing Director
+1-212-908-0782
or
Howard Miller
Director
+1-212-908-0737
or
James Bauer
Associate Director
+1-212-908-0343
or
Media Relations
Sandro Scenga
+1-212-908-0278
sandro.scenga@fitchratings.com