New 'Watch List' Could Become Standard for CMBS Industry.

In another indication of the evolution of the commercial mortgage-backed securities market, a watch list for use by servicers of CMBS transactions has been developed by the Commercial Mortgage Securities Association. The watch list serves to identify loans that need to be monitored for possible delinquency. This explicit listing of criteria for servicers to use is likely to become the standard for the CMBS industry. And going forward, it may even set the norm for the entire commercial mortgage industry.

The New York-based CMBS trade association's recommendations are the first such listing of criteria for the industry. Dottie Cunningham, executive director of the CMSA, said that prior to this, different servicers had different criteria for their individual watch lists. The CMSA effort - developed with input from different CMBS industry participants including servicers, lenders and the rating agencies - is an effort to standardize the process. Ms. Cunningham expects that it will now be easier for investors to compare CMBS deals.

Mary MacNeill, a senior director with Fitch Ratings' CMBS group (Fitch was also involved in developing the watch list criteria), believes that the watch list will serve as an early warning system to investors. The watch list is likely to be reviewed annually, but Ms. MacNeill expects the present list to be the prevailing version going forward, with some "tweaks here and there."

A loan could be put on the watch list for issues ranging from "financial conditions" - such as delinquent principal and interest payments, delinquent taxes, delinquent or force-placed insurance, declines in debt service coverage ratios - to "borrower issues," such as operating license or franchise agreement default and the bankruptcy of a borrower or guarantor. "Property condition" issues such ...