Leading up to the release of the CMBX 07-1 index last week, concern was mounting regarding the credit quality of recently issued commercial mortgages. Seen by many as the most aggressive of the rating agencies on the topic, Moody's Investors Service earlier this month announced it would require more credit enhancement for CMBS deals amid worsening underwriting standards.

The announcement caused a number of CDO issuers, who had not already done so, to reevaluate their commercial mortgage portfolios for fear of suffering the mark-to-market pain felt by those caught warehousing HEL collateral. Meanwhile, those with a short interest are widely expected to step into the sector via single-name CDS as well as the newest CMBX index in search of value, sources said. This has led many to wonder: How bad has CMBS underwriting become?

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