Kroll Bond Rating Agency (“KBRA”) has released a research report delving into borrower equity cashouts in the commercial mortgage backed securities market. Given increased competition amongst lenders, we sought to quantify the impact that equity cashouts have had in driving our main stressed metrics into riskier territory.
Although slightly less than half of the loans in KBRA’s Top 20 rated universe have returned equity to the borrower, we also individually reviewed characteristics of the loans to gauge the story behind the numbers. After further review, it is evident that a majority of the cashouts have occurred in loans where the borrowers have had long operating histories of at least five years and where equity has built-up in the property either through equity investments and/or asset appreciation.
That said, the credit metrics of these loans weakened faster than the broader universe. As one would expect, stressed leverage for cashout loans deteriorated faster than the broader Top 20 universe, ending Q2 2014 at 104.3% compared to 101.4% for Top 20 loans.
Although slightly less than half of the loans in KBRA’s Top 20 rated universe have returned equity to the borrower, we also individually reviewed characteristics of the loans to gauge the story behind the numbers. After further review, it is evident that a majority of the cashouts have occurred in loans where the borrowers have had long operating histories of at least five years and where equity has built-up in the property either through equity investments and/or asset appreciation.
That said, the credit metrics of these loans weakened faster than the broader universe. As one would expect, stressed leverage for cashout loans deteriorated faster than the broader Top 20 universe, ending Q2 2014 at 104.3% compared to 101.4% for Top 20 loans.
