A little good news for some corners of the commercial and residential real estate markets. Fitch Ratings sees a stable scenario for the structured finance sector in the U.S. for 2011.
“With the economic recovery slowly underway, U.S. structured finance will begin to fully implement its ‘lessons learned’ and turn the corner towards stability next year, according to Fitch Ratings in its 2011 Outlook report.
From a new issuance perspective, 2011 will bring an increased amount of transactions that continue to employ a ‘back-to-basics’ approach, according to Kevin Duignan, Group Managing Director and head of U.S. structured finance for Fitch.
“New structured finance deals will see continued improvement in loan quality and will be issued by higher credit quality sponsors employing less complex structures,” Duignan said in a Fitch news release.
The sector best-positioned for positive performance next year is U.S. asset-backed securities (ABS), with delinquency and loss metrics better than they have been in years across several asset classes.
“With ABS exhibiting impressive rating stability in the face of substantial recessionary headwinds, the outlook for the sector looks even better,” said Duignan.
The picture, however, gets murkier when delving into mortgages. The inventory of specially serviced U.S. CMBS loans remains high, though the rate of transfers has slowing.
Additionally, “liquidity is returning to the market which should help improve rating stability for CMBS in 2011,” said Duignan.
In the U.S., residential mortgage backed securities (RMBS), property prices are rebounding in many markets. However, affidavit issues surrounding judicial foreclosure processes figure to increase an already-huge shadow inventory of distressed and unsold properties.
According to Duignan, “The foreclosure issues will cast further a pall on a housing recovery that was slow out of the gate to begin with.”
Lastly, for one of the most negatively impacted sectors, the worst appears to be finally over for U.S. Structured Credit.
“The picture for collateralized loan obligations (CLO) appears brightest in 2011,” said Duignan, given the declining default rates observed in the high-yield sector.
However, structured finance collateralized debt obligations (CDO) with exposure to collateralized mortgage backed securities (CMBS) may see some marginal downgrades in 2011 due to pressure in the underlying CMBS sector, the Fitch executive said.
“Bank trust-preferred securities (TruPS) CDOs will continue to face, albeit slowing, deferrals and defaults,” Duignan said.