CDOs, MBSs, CMBS, CMOs

The State of CMBS

Posted on Tuesday, June 28, 2011

JP Morgan and Wells Fargo have set up conduits for their commercial-backed mortgage securities to get them off the balance sheets. Is this dangerously close to what happened ahead of the crisis with residential backed mortgages? Here are a few summarized thoughts;

SOME SIMILARITIES. BUT IMPORTANT DIFFERENCES
Borrower and Loan Quality
Origination process
Few loans (average 40 verses thousands)
Investor vetting
Valuation methods
Asset structuring and management (robo signer)
Shorter loan term
CRE issues caused more by ambitious projections and downfall in residential and economy

BIGGER RISK IS WITHOUT CMBS
Maturity Defaults Normally 70% pay. Now half. Trillion in CRE loans mature in few years
Special Servicing $63 billion delinquent now
New Construction. Crucial to economy. $7 trillion CRE industry
Limited CMBS money now is problem
Concerns about CRE values: Down 30 o 50% from peak. Down 3.7% in April. 5th month in row. Transactions up, but 20% distressed.
Concerns about uncertainty: Dodd Frank risk retention, etc

ADMITTEDLY
Pent up investor demand. Capital to deploy. Greed has short memory (example bidding up prices on multifamily)
Underwriting loosening from 50% LTV in 2007 to 70% now.About at 2004 levels.

CONCLUSION
CMBS like all financing has pros and cons.
Hence ratings, regulators, underwriters, investors negotiate-free markets
Key is balance. Swung one way. Now heading back to other.
BIG PICTURE: Problem is confusing solving crises with fixing systemic flaws. Sometimes two separate issues. Sometimes what’s good for one is not good for other.




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