Friday, February 22, 2008

CMB(S)X Index
Here is a fascinating article on the CMBX index that tracks commercial mortgages and is used by conduit lenders to price and insure commercial mortgage backed securities. The index has spiked since the start of the year (but has pulled back this week). Below is the index:

The article states that short sellers may have caused the spike. This quote looks past the credit market hysteria and gets to the bottom line:
Actual delinquencies on commercial-mortgage bonds hit a record low of 0.27% in January, according to Fitch Ratings. Among 40,000 loans in these bonds, only 293 were delinquent last month. The most bearish market prognosticators predict defaults on commercial mortgages will reach 2% over the next year or so, in line with the historical range. By comparison, the performance of the CMBX implies the default rate could be four times that level, according to analysts. "The level we're seeing in the CMBX right now just doesn't make sense," says Lisa Pendergast, managing director for RBS Greenwich Capital in Greenwich, Conn.
Defaults just hit an all-time low, bears predict defaults will revert to their norm but the CMBX index is pricing a default level of 8%. This does not make sense. This index is only two-years old and obviously has not been through many market cycles, and its unfortunate that loans are tied to its pricing. Especially when the article states "(t)he index itself has become one of the most popular ways to make bets on the outlook for real estate, and also to hedge against a downturn." It appears that the index will cause another round of write downs by banks holding commercial mortgage backed securities. There is sizable BS in the CMBX index. All TIC sponsors and other real estate borrowers need to be calling portfolio lenders.

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