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Weighing the CMBS Impact of Harvey and Irma

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A pair of back-to-back hurricanes in the space of a week may cause a near-term rise in CMBS delinquencies, according to Fitch Ratings and S&P Global Ratings. The exposure of billions of dollars in securitized commercial mortgages to the effects of Hurricanes Harvey and Irma comes as maturity performance is largely in line with expectations and the delinquency rate continues to decline.

Exactly how much property has been stricken by flooding, wind damage and other effects of Harvey and Irma isn’t yet clear. Fitch sees Texas Gulf Coast exposure of up to $10.4 billion of CMBS, and as of Monday had not yet released an estimate for the Southeastern states hit by Irma.

S&P has identified 288 loans backing S&P-rated deals with exposure to Harvey, totaling $5.2 billion. Of these loans, 95% are performing. The ratings agency’s initial estimate of S&P-rated collateral exposed to Irma in Florida totals $11.2 billion, with 70 deals representing over 10% of this exposure.

Morningstar Credit Ratings notes that although the Federal Emergency Management Agency hasn’t yet posted a formal disaster declaration in the aftermath of Irma, Morningstar’s initial analysis encompasses as much as $68 billion of CMBS exposure across four states, with Florida accounting for nearly $39 billion of the total. How much of that tally is actually located in areas that were affected by Irma has not been determined; however, the size and magnitude of the storm certainly are factors.

Ironically, the largest metro area in terms of volume of CMBS exposure isn’t in Florida. It’s the Atlanta area, which Morningstar says accounts for $15.3 billion of the $19.38 billion of at-risk CMBS in the state of Georgia. Among Florida metro areas, Orlando edges out Miami for CMBS exposure, with unpaid balances of $6.46 billion and $6.41 billion, respectively.

Earlier, Morningstar said that 1,529 properties backing 1,277 CMBS loans, with an allocated property balance of $19.4 billion, may be at elevated risk because of major flooding in Texas spawned by Harvey. Most of the properties, with a balance of $16.24 billion, are in Harris County, which encompasses Houston and its immediate suburbs.

In terms of getting a clearer picture of the extent of the damage, payment delays and insurance disbursements brought on by Harvey and Irma, CMBS servicers are already moving forward, Fitch and S&P say.. Based on Fitch’s discussions with servicers, “they are generally expected to waive late fees and default interest for borrowers in the affected area who are unable to make timely September mortgage payments.” In some cases, says Fitch, this may extend into October and will be evaluated by each servicer on a case-by-case basis.

Ratings implications for these late or missed mortgage payments are limited given master servicer advances, which means that the servicers have an obligation to advance missed mortgage payments “to the extent they are deemed ultimately recoverable,” Fitch said Monday. “Advances beyond this timeframe will likely be assessed individually as property condition and insurance details are gathered.”

Master servicers began reaching out to borrowers early last week through e-mail and telephone calls and have already received responses from those who were less impacted by Harvey or Irma, according to Fitch. “Information however, is limited; master servicers’ outreach is measured, given that so many borrowers and communities are first addressing life safety issues as immediate concerns, compounded by persisting communication and power issues.”

— Check out How to Help Clients Plan for Natural Disasters on ThinkAdvisor.


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