The CMBS market experienced what analysts called a meltdown recently, as super senior triple-A paper saw a significant fall in price.
These securities were trading near $50 at the close on Nov. 20 - which was a 35% drop compared with the previous week, Merrill Lynch analysts said.
No one saw it coming. "While we have grown increasingly bearish on the outlook for commercial real estate and commercial mortgages over the past several months, we never envisioned this," wrote Merrill Lynch CMBS analysts. "We are stunned and perplexed and we believe the rest of the market is too, by the magnitude of this move."
They said that it's not one single item that caused the market's virtual collapse. Instead, a number of factors came together and resulted in the breakdown.
These include the change in the Troubled Asset Relief Program (TARP) plan, the lack of buyers and liquidity in the cash market, rising economic concerns, etc. - all the same problems that have ravaged CMBS's sister markets.
Exacerbating the situation was the transfer to 30-day delinquency status of two loans in recent-vintage CMBS transactions.
The first was the $125 million Promenade Shops at Dos Lagos within JPMCC 08-C2 (10.8% of the transaction).
The other was the $209 million Westin Portfolio pari passu loan, which was split into a $104 million loan in the same JPMC 08-C2 transaction (8.9% of the deal) and a $105 million loan in the JPMCC 07-C1 deal (8.9% of the transaction).
Barclays Capital analysts said that these transfers are notable for a couple of reasons: the lack of seasoning of each loan, and the concentrated exposure in each specific deal.
The problems in other sectors of the market, specifically RMBS, resonated in this instance.
"We attribute the speed at which these loans went delinquent to a combination of weak local economies and/or aggressive 'pro forma' underwriting trends," Barclays analysts wrote. "In particular, both loans are suffering due to secondary debt, which took overall leverage too high."
Last week, both the Federal Reserve and the Treasury Department announced the new Term Asset-Backed Securities Loan Facility, which is meant to allow holders of triple-A consumer ABS to borrow from the New York Federal Reserve against those securities. The announcement included a section that stated eligible ABS under the new facility could possibly include CMBS as well as non-agency RMBS.
Commercial mortgage participants, who were left to grasp at straws after the sector's meltdown, were buoyed by the news.
"It indicated to us, at the very least, the Treasury and the Federal Reserve are aware of the problems in the commercial mortgage financing and CMBS arena, and are at least thinking about ways of addressing it," said Merrill analysts.
The problems in CMBS apparently mirror those in residential mortgages. In other words, the once-healthy sector is tracking the route of the collapsed housing market's demise.
And as this previously robust market falls into the fray, like its securitization market counterparts, it is now asking the government to come to its aid.
Will the government's resources be enough? That seems to be the million dollar question, and it remains to be answered.
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