Concerns have begun to mount that underwriting standards for loans in newly issued
commercial mortgage-backed securities (CMBS) are on the decline. Addressing this issue,
the analysts at Fitch Ratings say they believe there is quite a way to go before standards
approach levels seen in 2007, a year viewed by many as the most volatile vintage for CMBS.
While Fitch agrees that underwriting standards have declined in recent months, the company
stressed that deterioration so far has been off of "very high standards."
It has been said that commercial real estate operates on a 10-year cycle with seven-year memories.
Therefore a more important question is, Where will underwriting standards be in two to three years?”
said Huxley Somerville, group managing director and head of U.S. CMBS for Fitch.
He added that the last thing the re-emergent CMBS industry needs is a return to 2007 in 2014,
and dynamic that becomes especially relevant if loan originating shops continue to emerge and
competition for loans increases. “There is little doubt that a large number of originators,
chasing a finite supply of potential loans in any one year, will likely cause underwriting
standards to drop further in order to win the mandate,” Somerville wrote.
“It behooves all in the industry to ensure that discipline and memories are maintained so
that the industry, too, is maintained.”
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