Fitch Ratings Steps Up Probe into Commercial Mortgage Exposure

Fitch Ratings expanded its analysis of commercial real estate (CRE) as the performance metrics “deteriorate at an unprecedented pace.” As part of the broader analysis, Fitch issued surveys to more than 75 US bank and thrift institutions it rates, requesting more details on the firms’ exposure to CRE. Details sought include collateral type, geography, internal risk rating and performance, according to a Fitch Ratings statement Tuesday. CRE loans, excluding construction and development portfolios — which Fitch says tends to present more problems — represent more than 125% of total equity for the 20 largest banks Fitch rates. That risk is higher for banks with less than $20bn of assets, where average CRE exposure represents more than 200% of total equity. This substantial exposure to CRE loans is only more risky considering the degree of deterioration among CRE loans, Fitch says. The rating agency released analysis last week detailing the 3.04% delinquency rate among commercial mortgage-backed securities (CMBS), which is on track to rise above 5% delinquency by year-end. The exposure to this CRE debt and its deteriorating performance lends “major concern” to the current outlooks on large institutions. Fitch currently keeps negative outlooks on nearly half of the 20 largest US banks and thrift institutions it rates. “While the relative size of the CRE portfolio is smaller for some of the very large banks Fitch rates, the recent performance trends, expectations for continued economic weakness and the uncertain availability of the CMBS market increases the concern regarding CRE exposure and makes it a likely rating driver as we look out over the next few quarters,” says James Moss, managing director and co-head of Fitch’s North America financial institutions group. The Federal Reserve and US Treasury Department on Monday responded to this uncertain availability of CMBS, extending the deadlines of major liquidity programs through the Term Asset-Backed Loan Facility (TALF) aimed at stimulating CMBS issuance. Write to Diana Golobay.