CMBS market participants have been talking about the negative effect that the CMBX has had on spreads in the absence of cash markets flow and or issuance. This was also a hot topic at the Mortgage Bankers Association's (MBA) Commercial Real Estate Finance and Multifamily Housing Convention and Expo 2008. In a panel moderated by MBA Chairman Keiran Quinn, the discussion focused on informing the investor-dominated crowd about the basics of CMBX.
The main discussions were focused on CMBX pricing and how to account for the default protection levels that infer much higher loss rates - 12% to 15% - than are actually occurring. Lisa Pendergast, managing director at RBS Greenwich Capital, predicted that the more normal credit curve (triple-A/triple-B-minus) was in the 250 to 300 basis point range as opposed to today's cash level of roughly 1200. Triple-As traded 180 basis point over swaps at midday Tuesday. In terms of the transparency issue for CMBX, less than $100 million per day is traded in the index but the price swings make it seem as if the volume is enormous.
Panelists at the conference said that a daily reporting of volume will pour some cold water on the volatility in this synthetic market.
Also missing from the equation is a more liquid index that covers more issues over a greater timeframe, maybe back to 1998. The problem is the already ramped up defeasance nature of the deal structure would make the older deals underlying that particular vintage year out of line with the newer deals and hence not quite in synch. Robert Brennan, head of real estate finance and securitization at Credit Suisse, said that the synthetic market has caused price dislocations to happen everywhere.
In her presentation, Pendergast showed data on cumulative default rate comparisons dating as far back as 1995. In that vintage timeframe, the cumulative default rates were 11%, with total loss rates of between 2% to 3%. She compared that with today's delinquency rates that fall under 1% and combined that with a loss rate that is just as low.
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