Even while prepayments in the residential mortgage market cool down, the number of commercial mortgage borrowers currently prepaying their loans is not only soaring but anticipated to accelerate through year-end and into 1Q06, according to Wachovia Securities analysts. For the CDOs backed by CMBS and other commercial real estate assets that indicates a chance that performance could be boosted, resulting in upgrades. In the same manner, increased call options on unsecured credit obligations have accelerated paydowns in the later-vintage high-yield CDO market (see ASR 8/22/05).

"In the coming months, already accelerating defeasance levels will likely be boosted by year-end's approach, rising short-term rates, a flattening yield curve and strong property markets for which valuations typically lag rising interest rates," Wachovia analysts wrote, noting that one of the main deterrents from commercial property valuations - cap rates - typically follow several months behind interest rate changes.

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