Though U.S. CMBS servicers resolved fewer loans in 2007, more of those loans incurred a loss and at a higher severity than in the prior year, according to the latest annual CMBS Loss Study from Fitch Ratings.

Of the 319 loans, representing $1.8 billion in original balance, 151 loans (46%) incurred a loss. The average loss severity for loans resolved with a loss in 2007 increased to 41.5% while the average resolution time decreased to 22 months relative to 2006 of 31.8% and 28 months, respectively. The decline in resolution time and increase in loss severity in 2007 is the first time Fitch has observed a divergence of the two factors which are normally correlated.

"The turbulence of the capital markets has increased loss severities and we expect it will increase resolution times for all assets", said Adam Fox, Senior Director Fitch Ratings. "The illiquidity of the market and the slowing U.S. economy make it harder for servicers to sell distressed assets as market turbulence causes many potential buyers to stand on the sidelines".

As of year end 2007, special servicers had an inventory of 760 loans representing $4.7 billion in original principal balance as specially serviced. Fitch expects this number to increase in 2008 and exceed $6 billion as defaults rise and resolutions slow.

Office properties represented the largest share of workouts with loss for the first time in 2007 with 31.6% of resolutions with losses. Workouts of retail properties incurred the highest average loss at 48%, nearly double the average loss in 2006. "Retail loss severities in 2008 are likely to be more in line with 2007 given declining economic conditions, reduced consumer spending, and increasing vacancies", said Fox.