S&P Worries about Deterioration in CRE Underwriting.(Standard & Poor's)

Standard & Poor's has expressed concern about certain developing trends related to commercial mortgage-backed securities that could lead to higher risk for investors in future.

The credit rating agency said in a written release that it is seeing a deterioration in underwriting and origination standards for commercial mortgage loans; relaxed requirements for capital expenditure, tenant improvement and leasing commission reserves; a rise in interest-only loans or loans with interest-only periods; and "relaxed adherence" to structural and legal safeguards.

As well, the current CMBS landscape which is "characterized by increased liquidity, fierce competition, an influx of new buyers, and a CDO market-focused mindset has significantly altered the supply/demand dynamics of the market, possibly making future transactions more vulnerable to negative credit events," the rating agency reports.

While these trends are not yet a wider market concern, they are "looming on the horizon," according to Kim Diamond, a managing director in S&P's real estate finance group.

Expanding on the above concerns, S&P said that balloon-balance refinancing risk is likely to be a greater concern in a rising interest rate environment and with 10-year CMBS reaching the end of their lockout periods.

The rating agency is also seeing a "spate of new entrants into the loan origination market," which has spurred "fierce competition, leading to a gradual degradation of underwriting standards and criteria."

Originators, operating in what is widely seen as a borrowers' market, "have increasingly undertaken ...