Ratings

In the second quarter, the delinquency rate fell to 0.55% from a first-quarter level of 0.58%. This is illustrated in charts 1 and 2. Except for the 1995 vintage year, all vintage year delinquency rates were basically flat. The 1995 vintage year jumped by 425 basis points (bps) to finish the quarter at 10.69%. This more than doubled the 1996 vintage year, the next highest. With only $512 million outstanding in 1995, the Larken loan in the Nomura Asset Securities Corp. Series MDIII single-handedly pushed up the 1995 delinquency rate in the second quarter. The Larken portfolio, with a $21.3 million balance, was reported as REO in the second-quarter 2006. Four limited service hotels collateralize the Larken REO.

Standard & Poor's total CMBS amount delinquent ended the second quarter at $2.35 billion, approximately 5% lower than in the first quarter. With fewer loans becoming delinquent, existing delinquencies are advancing gallantly through the aging cycle. In the quarter, the 30-, 60-, and 90-day delinquencies all declined, reflecting fewer new defaulted loans and existing loans that have moved into both foreclosure and REO status (see chart 3). Year-to-date, the 30-, 60-, and 90-day aging categories have fallen by over 40%. With less new loans becoming delinquent and many existing delinquencies entering REO status, REOs have become the largest delinquent category at $1.06 billion. REOs, which represent a significant portion of total delinquencies at 45%, are reviewed later in the newsletter.

Of the total amount delinquent in the second-quarter 2006, $59.3 million (as illustrated in chart 4) can be attributed to last year's hurricanes. There are currently 18 hurricane-related delinquent loans, half of them multifamily. Most of the loans are 90-plus-days delinquent, with one loan each in foreclosure and REO. Hurricane delinquency levels have declined 83% from their November 2005 peak of $340 million.

In mid-June 2006, Standard & Poor's visited several CMBS collateral properties affected by Hurricane Katrina. We present a brief description of our observations for significant assets that were visited in table 1. The large assets that were visited are open and performing well or expected to reopen in the near term. For the most part, these assets had either minimal property damage or borrowers with deep enough pockets to carry debt service payments and other costs until insurance proceeds became available. The economic outlook for New Orleans is uncertain at best. Fewer than 2,000 of the city's 22,000 pre-Katrina businesses have reopened, while the New Orleans MSA population is down 280,0000, or 22% of pre-Katrina levels. The outlook will primarily depend on whether or not New Orleans is once again perceived as a viable travel and convention destination. In addition, the reestablishment of lost housing is crucial so that the city's population and wage earners can return.

Table 1 New Orleans Property Visits
Transaction (by property type)	Property name	Loan balance (mil. $)	No. of rooms/ square footage	Street address	Comments
Hotel
GMAC Commercial Mortgage series 2004-C3	Hyatt Regency New Orleans	203.3	1,184	500 Poydras Plaza	The building is currently undergoing a complete rehabilitation using insurance proceeds. The hotel is expected to re-open by September 2007. The retail arcade below the hotel is also closed and may not reopen.
Wachovia 2004-WHALE 4	Ritz Carlton New Orleans	88.0	527	921 Canal Street	The property experienced significant flooding and is still closed. The reservation system is expected to be back on line in August 2006. The hotel is expected to re-open in December 2006 using insurance monies to finish a complete renovation.
GS Mortgage Securities Corp. series 2005-GG4	Astor Crowne Plaza New Orleans	84.8	707	739 Canal Street	The front of the hotel is undergoing renovations, with a new concierge and lounge. Management is looking to reposition the property as a more luxurious alternative to other available choices.
Nomura Asset Securitization, series 1996-MDVI	Marriott New Orleans	81.0	1,329	555 Canal Street	The roofs have been repaired, and the pool area will be resurfaced. The lobby will be redone in 2007 at cost of $7 million.
Office
Bear Stearns Commercial Mortgage series 2002-TOP 6	Bank One Center	64.5	1,004,625	201 St. Charles Avenue	This was the first class A building to open after the storm. Building occupancy is approximately 97%. Rents will be stable and may rise in the future due to a supply shortage of class A space.
Credit Suisse First Boston Mortgage series 2004-C2	Energy Centre	52.2	762,131	1100 Poydras Street	This is a class A office property that is approximately 95% occupied. It did not suffer much storm damage, and is in good condition. The property is at the northern end of the central business district. The property manager expects a viable business center to develop nearby, boosting the property's attractiveness. Rents will be stable and may rise in the future due to a supply shortage of class A space.
Retail
JPMorgan Chase Commercial Mortgage series 2005-LDP2	Shops at Canal Place	90.0	214,443	301-333 Canal Street	The property was significantly damaged in the aftermath of the storm. All common area repairs are finished. Saks Fifth Avenue was significantly damaged by a fire, but is scheduled to reopen in November 2006. Approximately two-third's of in-line space is operating, with the remainder of the space in the process of reopening in the next six months.

Based on our New Orleans visit and the recent receipt of an appraisal on the Ritz-Carlton New Orleans hotel, Standard & Poor's lowered the ratings on several classes in the Wachovia Bank Commercial Mortgage Trust 2004-WHALE 4 transaction on June 28, 2006. The whole-loan balance is $87.6 million, which is secured by the fee interest on nine distinct condominium units, including the Ritz-Carlton hotel and Iberville Suites. Both properties have undergone significant renovations. The Ritz-Carlton is expected to reopen by December 2006 and Iberville Suites in February 2007. The lowered ratings reflects Standard & Poor's expectations that, based on the recent appraisal and our site visit, the collateral will not meet its initial stabilized operating levels during the loan term.

All property types had single-digit delinquency rate changes with the exception of office, which increased 23%. The office delinquency rate moved higher by 6 bps to 0.32%. Lodging edged higher by 6 bps as well, to 1.22%, while retail increased 2 bps to 0.29%. The industrial and multifamily delinquency rate each declined by 6 bps to 1.15% and 1.05%, respectively (see chart 5). The delinquent property type amounts moved in the same direction as their respective delinquency rate in all cases, except for lodging (see chart 6).

Liquidation loss experience results by property type were also mixed for the quarter. Health care, retail, industrial, and office all realized higher loss experience rates, while lodging and multifamily declined. Retail reported the lowest loss experience rate in the second quarter at 10.30%, which was only slightly lower than that of multifamily, which improved to 10.38% (see table 2). Health care continues at above-average levels, and industrial had a fairly large jump from 35.67% to 54.12%. Industrial's increase was the result of an industrial portfolio that liquidated at a loss severity rate of 81% in the Morgan Stanley Capital Series 1999-LIFE1. The properties suffered from tenant vacancies reflecting weakness in demand for industrial space in a soft Detroit, Mich. economy. In the aggregate, the property type liquidation loss experience rate in the second quarter was 19.13%.

Table 2 Loan Resolution And Liquidation Experience
Delinquent loan resolutions	2003	2004	2005	1Q 2006	2Q 2006
Total delinquent loan resolutions ($000s)	2,091,883	3,131,692	3,050,086	871,691	597,949
Became current ($000s)	1,119,124	1,635,815	1,084,016	490,625	280,758
Became current (% of total resolutions)	53.50	52.23	35.54	56.28	46.95
Liquidated ($000s)	972,759	1,495,878	1,966,071	381,066	317,191
Liquidated (% of total resolutions)	46.50	47.77	64.46	43.72	53.05
Liquidation loss experience (%)	41.07	29.01	24.82	26.81	19.13
Health care (%)	94.92	73.40	35.91	20.07	41.80
Lodging (%)	48.03	30.95	38.39	46.06	28.64
Retail (%)	43.17	28.36	22.63	8.85	10.30
Industrial (%)	40.48	35.63	29.31	35.67	54.12
Multifamily (%)	27.41	17.62	19.71	27.31	10.38
Office (%)	25.00	28.90	17.66	20.82	38.80

We remain cautious that in certain markets, the scheduled conversion plans may not occur or are significantly behind schedule due to a shift in local market dynamics. Most notably, in the Florida market, converters of hotel and multifamily properties are reevaluating their conversion plans in favor of returning back to operating rentals. With excessive condo supply and speculative buyers exiting the Florida market, some developers are realizing that condo conversions may not be the best execution. This is especially true in some markets where multifamily rents have begun to increase due to more demand as a result of higher home ownership costs. In the CSFB 2005-CND1 transaction, one of the three remaining loans is secured by a hotel property in Miami Beach. The property, Royal Palms, is significantly behind schedule in its conversion efforts. The loan was put into non-monetary default by the servicer, Wachovia Securities, on April 18, 2006, because Wachovia did not receive certain property information required by the loan documents. The non-monetary default was subsequently satisfied and rescinded by the servicer on June 19, 2006. According to the servicer, the borrower did not make its July 2006 payment on the mezzanine loan or first mortgage debt. The mezzanine lender has stepped in and cured the late payments.

For those projects that may be considering abandoning their conversion plans or are significantly behind schedule in their conversion, the question remains as to whether the total outstanding rated debt on these complexes could be extinguished as an operating rental facility. Several borrowers have indicated to the servicer that, as a rental property, their outstanding debt could be paid off. As the amount of leverage on a conversion loan was predicated on principal reductions from condo sales, successful refinancings may be at risk.

Multifamily delinquencies proved to be the most active of all property types in the second quarter with almost $500 million of loans participating. In the quarter, multifamily resolutions exceeded new delinquencies by a 1.38 to one margin (see table 3). This compares to a 1.23 to one margin for all CMBS loans. (see chart 7). Compared with the first quarter, new delinquencies were lower by approximately 5%, while resolutions fell by 30%. The drop-off in resolutions was mostly the result of a lower level of office liquidations, which declined by 80%.

Table 3 Second-Quarter 2006 Delinquency Activity By Property Type
Property types	Delinquent as of April 1, 2006 ($)	Resolved delinquent loans ($)	Remaining delinquent loans ($)	New delinquencies ($)	Delinquent as of June 30, 2006 ($)
Lodging	430,146,048	67,226,109	358,323,662	51,233,376	409,557,038
Retail	378,320,913	119,110,789	257,137,006	123,271,875	380,408,881
Office	340,300,060	36,906,368	302,400,548	95,509,128	397,909,676
Multifamily	835,806,358	273,801,136	560,100,389	198,554,435	758,654,824
Health care	99,676,174	19,067,827	80,026,067	1,712,819	81,738,886
Industrial	223,445,470	38,846,779	182,779,077	13,385,267	196,164,344
Other	168,189,609	42,989,854	124,851,877	2,076,693	126,928,570
Total	2,475,884,633	597,948,861	1,865,618,626	485,743,593	2,351,362,219

Texas has led multifamily delinquencies for the past several years, and still captures a significant portion of the total, at 38%. This is beginning to trend lower. In the current quarter, $44.6 million of new Texas multifamily delinquencies were created, a level that decreased over last quarter. The number of resolutions, at $45.5 million, also declined from last quarter but offset the new additions. With new multifamily delinquencies up 9% over the prior quarter, other geographic areas picked up the shortfall.

Tennessee registered in with eight new delinquent multifamily loans in the quarter with a balance of $65 million. Of the eight loans, six were secured by properties in Nashville. Four of the Nashville properties are in the GMAC Commercial Mortgage Securities Inc. 2004-C3 transaction and have been suffering from borrower neglect, deferred maintenance, and local market conditions. While Nashville has been able to attract employers to the area, reflecting affordable housing, home affordability also lures potential renters. The Standard & Poor's Nashville CMBS multifamily delinquency rate in the second quarter was 31.1%.

As in Texas, home affordability has caused multifamily rentals to suffer. The Nashville area's first-quarter 2006 median home price of $165,300 was 24% below the national level according to the National Association of Realtors. Median home prices in Dallas and Houston are approximately one-third lower than the national averages. In addition, according to REIS Inc., absorption in Nashville dropped by 0.6%, and the multifamily vacancy rate increased to 6.8% in the first-quarter 2006 compared with the fourth-quarter 2005 when it was 6.2%. REIS expects the vacancy rate to settle down to 6% as demand stays in line with new construction levels.

The demand for apartments in both of these geographic areas is expected to remain lower than those markets where the price differential between high-cost housing and apartment rents are greater.

Rating activity among North American CMBS was positive in the second quarter, but was tempered slightly by an increase in downgrades from the first quarter. There were 196 rating actions in the quarter, composed of 154 upgrades and 42 downgrades (see chart 8).

During the second quarter, floating-rate deals experienced both the most upgrades and downgrades. In total, there were 86 floating-rate actions, which accounted for 44% of the quarter's North American CMBS rating activity. Fusion transactions experienced 51 rating actions in the quarter (see table 4).

Table 4 Rating Actions By Transaction Type
	Upgrades		Downgrades
Transaction type	No.	%	No.	%
Floating-rate	72	46.75	14	33.33
Fusion	42	27.27	9	21.43
Conduit	35	22.73	9	21.43
Single borrower	4	2.60		0.00
Misc.	1	0.65	10	23.81
Total	154	100.00	42	100.00

The increase in lowered ratings was most apparent among floating-rate transactions. Because some floating-rate loans have multiple classes pegged to the performance of a single property (usually larger balance loans), any material decline in a property's operating performance could trigger multiple downgrades. This was the case during the recent quarter, as six of the 14 downgraded floating-rate classes were attributable to the underperformance of one property.

In addition, as floating-rate loans enter their second or third year of seasoning and approach their maturity dates, they are more susceptible to downgrades if certain operating strategies are not met and refinancing concerns arise. The 2003 and 2004 vintages fell into this category. In the quarter, it was found that several of these vintage year deals had loans that were not meeting their operating expectations, and as a result in several cases, ratings were lowered.

Other downgrades in the quarter reflected declining operating performance since our last review at various properties in certain distressed geographic areas. Large space reductions in Detroit resulting from the downsizing auto industry, along with the slow and uncertain recovery in New Orleans, weighed on property performance and triggered rating actions. In addition, the multifamily segment in Dallas and Houston, especially in the class B and C categories, continues to struggle from lackluster demand. As a result, several deals with multifamily loans from Texas were downgraded, reflecting lower rents and concessions.

The ratings on four classes were lowered to 'D' in the second quarter. Three were due to interest shortfalls, and one reflected an imminent principal loss. The ratings on two classes in the Morgan Stanley Dean Witter Capital I Trust Series 2001-PPM transaction were lowered due to interest shortfalls relating to a loan modification. The modification allowed the borrower to make IO payments until year-end 2006 or until the performance at the properties stabilizes. We do not believe that the underlying properties will generate sufficient cash flow to service the debt upon the lapse of the modification. As a result, Standard & Poor's does not expect the shortfalls to be recovered in full for an extended period.

In the Bear Stearns Commercial Mortgage Securities Series 2001-TOP2 transaction, interest shortfalls were due to the servicer's incurrence of legal expenses while defending itself in a lawsuit filed by the borrower. While the case was settled during the recent quarter, interest shortfalls affected class J from this Bear Stearns deal while the suit was underway. The shortfalls affecting class J will take an extended period of time to pay back, which warranted a downgrade to 'D'.

The rating on class N from COMM 2000-C1 Commercial Trust was the other rating to be lowered to 'D' in the quarter. This class, the lowest-rated certificate, which has less than $75,000 subordinate to it, will suffer a principal loss as specially serviced assets resolutions occur.

REO properties have typically moved close to overall real estate property fundamentals. As real estate fundamentals turned negative in 2000, delinquencies accelerated and new REOs gathered momentum until they peaked in 2004. Last year witnessed a deceleration in delinquencies, including new REOs, as well as the average REO loss severity, as improving property fundamentals took hold among all property classes. REO resolutions accelerated in 2005, reflecting high levels of liquidity for real estate investment and approached $700 million, or 64% more than in 2004 (see chart 9).

Second-quarter REO activity showed mixed results. With total delinquencies declining, surviving delinquencies are moving toward or have become REO. For those loans that have moved into REO status, REO liquidations are benefiting from a fundamentally strong and liquid real estate market. So, although REOs are usually the more problematic assets, in the current environment, they are being sold off more quickly and at lower loss severity rates. On the negative side, however, the amount of REO resolutions has slowed. The net effect is that, starting in 2005 and continuing into 2006, the margin between the amount of REOs that got resolved and the amount of new REOs that came in is eroding. In 2005, the margin was 1.27 to one. In the first quarter 2006, the margin declined to 1.06 to 1. In the second-quarter 2006, the margin reversed, with resolved REO approximately one-half less than new REO, or a margin of 0.52 to 1. Currently, there is $ 1.06 billion of REO outstanding (see chart). This represents about 0.25% of total CMBS outstanding.

In 2006, there were more retail properties that entered REO status, compared with other property types which are sending fewer loans into REO. The largest retail loan (with a principal balance of $60 million) that became REO in the second quarter consisted of nine retail properties previously secured by one loan. These properties all had Wal-Mart as their anchor until Wal-mart vacated the properties to move to nearby newly constructed super centers. The properties were reported as REO in April 2006.

In the second quarter 2006, the number (24) and balance ($124.3 million) of REO resolutions were both lower by approximately 40% from first-quarter 2006 levels. The number of resolutions in 2006 should, however, easily surpass all previous years if they continue at their present pace. The total resolved balance, however, would not exceed 2005 levels, because the balances of REO resolutions in 2006 are smaller. This was especially the case for office, where many small balance liquidations have occurred at above-average loss severity rates.

All property types (except for office) had lower loss severities in the second-quarter 2006 and shorter recovery times. So, although new REOs are being created at a greater rate, the liquidations that are occurring are at lower loss severities and taking fewer months to resolve. This illustrates the significant liquidity chasing real estate assets. In the second-quarter 2006, the average loss severity was 24.4%, which on average took 12.8 months to resolve. The average REO loss severity for the period illustrated was 47.7% and took 16.7 months to resolve.

REO loss severities were at above-average levels during the period between 2001 and 2004, reflecting the decline in real estate fundamentals. Health care REO had the worst loss severity of 95% of all property types during this period and the longest time to resolve. An underperforming health care property can take an extended time to turn around as new licenses are obtained and management operators replaced. As a result, from the time a health care facility is foreclosed on until it is ready for sale, many months, if not years, can pass. During this period, if the servicer is making advances, the property's exposure accumulates, increasing loss severity upon resolution. The average number of months for a health care REO facility resolution was 23.9 months compared with 16.7 months for the average of all property types.

The longest REO liquidation during the period presented was 57 months. The loan, the Horwitz-Ramada Inn Portland, Ore., became REO in January 2001 and was liquidated in December 2005, with an 85% loss severity rate. Located near the Portland airport, it fell out of favor when it was announced that a halfway house was planned for construction next to it.

Although the amount of lodging becoming REO has slowed, lodging still represents the largest percentage of REO at 29.3% (see chart 10). Lodging accounts for 8.0% of total CMBS and has the worst property type percentage multiple of REO to CMBS at 3.6 times to one. As lodging was one of the hardest hit property types during the reporting period (2000 to second-quarter 2006), the REOs that remain are likely to be the least salable. The remaining properties on average have stayed REO for 23 months. Most notable in this category are the mid-price hotel chains with a food and beverage component, such as Holiday Inn and Ramada Inn.

At the other end of the spectrum are manufactured housing parks. Manufactured housing parks account for 0.44% of REO and 2.0% of total CMBS for the best property type multiple of 0.22 times to one. Manufactured housing park loans in CMBS are secured by income-producing properties that consist of the land and improvements that manufactured homes reside on. Lease income is generated by leasing the pad, or home site, to manufactured home owners. Manufactured homes are financed with contracts that do not serve as collateral in CMBS deals. If securitized, these contracts typically appear in ABS transactions. The performance of manufactured home transactions went through volatile times, due to defaults on the underlying contracts, followed by high repossession and loss severities. Loans on the parks have performed well, however. This is because most lenders on the homes continue to make lease payments to park operators, even after an owner defaults, to maintain their security. Manufactured housing parks benefit from a fairly stable income stream, supply restrictions, and low operating costs. Currently, there is only one REO CMBS manufactured housing park outstanding.

Texas has the greatest amount of REO at 23.5% of the total REO amount and comprises 7.1% of CMBS (see table 5). After Texas, state REO concentrations drop to below 10%, with Florida the next highest at 9.8%. California and New York comprise the largest percentage of CMBS at 15.0% and 14.0%, respectively, and have some of the lowest state REO levels of 0.81% and 0.54%, respectively.

Table 5 REO By State
State name	% of total REO balance	% of total CMBS
Texas	23.45	7.14
Florida	9.82	6.51
Michigan	6.61	2.14
Massachusetts	5.95	2.44
Ohio	5.75	1.90
Illinois	4.33	3.39
Georgia	4.02	2.38
North Carolina	3.66	2.13
Tennessee	3.49	0.87
South Carolina	3.33	0.74
Oklahoma	3.01	0.39
Cayman Islands	2.82	0.01
Pennsylvania	2.29	2.72
Colorado	1.90	1.46
Mississippi	1.27	0.25
Louisiana	1.14	0.71
Kansas	1.13	0.45
Montana	1.11	0.03
Missouri	0.88	0.76
California	0.81	15.15
Maryland	0.76	2.61
Virginia	0.72	3.33
Oregon	0.66	0.69
Connecticut	0.59	1.29
New York	0.54	13.90
Arkansas	0.51	0.21
Washington	0.33	1.57
New Jersey	0.32	2.98
Indiana	0.29	0.91
Minnesota	0.14	0.93

Texas has consistently made up a large percentage of REO, reflecting concentrations of problem multifamily loans. Texas multifamily alone represents 10% of total REO. The slowdown that has occurred in multifamily REO is directly related to the Texas multifamily market. With an improving Texas multifamily market driven by a stronger economy, liquidations are returning more favorable levels. Texas REO multifamily liquidations are exhibiting positive trends with liquidation severity levels in 2004 at 35%, 2005 at 30%, and year-to-date in 2006 at 21%.

How long this favorable climate will continue is uncertain, as negative apartment news has been reported in Dallas and other Texas markets. According to M/PF YieldStar, Dallas apartment properties plunged in the second-quarter of 2006, with absorption at the lowest level since late 2004 and well off the absorption rate in the first quarter. The slowdown is attributed to rising single-family home inventories that are producing sales incentives and turning renters into buyers. As Texas multifamily is a large contributor to REO and overall CMBS delinquencies, this change, if extended, may not bode well for future CMBS credit performance.

The top 25 REOs sorted by balance account for 60% of total REO. Balances ranged from $10.2 million to $82.3 million, with the lodging concentration the highest at 38% (see table 6). Based on the last reported loan information provided by the servicer or special servicer, the LTV for this group of REOs was 126%, with a debt service coverage (DSC) of 0.93.

Table 6 Top 25 REO Properties Based On Amount Outstanding
Issuer name	Series	Property name	Amount outstanding (mil. $)	Property type	City	State	Months in REO	LTV (%)	DSC ratio
COMM	2001FL5	Houston Hyatt	82.30	Lodging	Houston	Texas	19	105.5	0.77
Mortgage Capital Funding Inc.	1998-MC3	Kranzco Portfolio	60.00	Retail	Various	Various	3	153.1	1.02
Credit Suisse First Boston Mortgage Securities Corp.	1998-FL1	Holiday Inn - Sunspree Resort	47.20	Lodging	Orlando	Florida	62	157.3	0.22
Morgan Stanley Capital I Inc.	1998-XL1	Charlestowne Mall	45.92	Retail	Saint Charles	Illinois	5	109.3	1.06
Credit Suisse First Boston Mortgage Securities Corp.	2001-FL2	Hotel Royal Plaza	35.00	Lodging	Orlando	Florida	10	99.7	0.99
Nomura Asset Securities Corp.	1995-MDIII	Cayman Islands	29.87	Lodging	—	Cayman Islands	37	84.4	0.57
Morgan Stanley Dean Witter Capital I Trust	2002-IQ3	Tulsa Distribution Center	28.65	Industrial	Tulsa	Oklahoma	7	184.8	1.38
Credit Suisse First Boston Mortgage Securities Corp.	2001-CK6	Biltmore Square Mall	25.87	Retail	Asheville	North Carolina	6	136.9	0.98
Commercial Mortgage Acceptance Corp.	1998-C-2	330 South Warminster Road	24.34	Mixed use	Hatboro	Pennsylvania	3	104.1	1.27
Nomura Asset Securities Corp.	1995-MDIII	Larken	21.43	Lodging	Various	Various	2	87.1	(0.17)
Salomon Brothers Commercial Mortgage Trust	2001-C1	Atrium At Highpoint	19.95	Office	Irving	Texas	14	224.2	1.65
Morgan Stanley Capital I Inc.	1997-XL1	Westshore Mall	18.72	Retail	Holland	Michigan	14	136.1	1.17
First Union National Bank Commercial Mortgage Trust	2000-C2