Comments on: Record CMBS Loss Severities Expose Major Flaw in Securitization, Compensation Models

By: Concrete Jungle

Concrete Jungle — Sat, 18 Sep 2010 17:33:09 +0000

CrabsOfSteel is correct, but the Agencys’ investments in CMBS are double his guesstimate.. There were 120 Conduit deals in ’06 & ’07. The A1A tranches that CoS is referring to were directed tranches with the majority of the multifamily collateral (not all of it, but most) serving just that tranche, which was pre-sold to Freddie and Fannie. The ’06 & ’07 balance for the A1A tranches was $55 billion, but the total outstanding balance (they started this practice in CMBS back in 2003) is $75 billion.

On average, in ’06 & ’07, the A1A tranche was 15.4% of the total deal. So, to CoS’s point, the super senior was 70% of the total deal, A1A is about 10% of that super senior class of bonds (15.4% * 70%). Although it is not directly correlated, if you line up, say, the worst 10 CMBS deals of 2007 and put it next to a list of the 2007 deals with the largest A1A tranche sizes – there is some overlap – C30 (29% A1A tranche, this is the largest Stuy Town exposure), IQ13 (29%), LBCMT 2007-C3 (28%), CSMC 2007-C2 (the winner at 46%), etc.

I came back across your article all these months later because of the article out this week that implies that Fannie & Freddie are the stalwarts in the CRE multifamily space because of their low delinquencies in their portfolio, but the article just ignores their CMBS investments altogether. I look pretty perfect too, you just have to ignore all the mistakes I’ve made, catching me at just the right angle, under just the right light, and from a pretty good distance away!

By: crabsofsteel

crabsofsteel — Tue, 23 Feb 2010 18:47:21 +0000

70% of every CMBS deal done since 2006 was "super-senior" AAA with 30% of protection underneath it (including support from other AAA-rateed classes … let's not get into how there could be different flavors of AAA if it's supposed to always mean money good). The agencies took down most of the multifamily portion of that 70%. There were 60-70 fixed-rate conduit deals done in 2006-7, so if you figure an average bond size of $200MM, they bought $26BB of these bonds. I'm going to take a peek at their 10Qs to see if they make any mention of them.

By: REIT Wrecks

REIT Wrecks — Tue, 23 Feb 2010 04:52:20 +0000

David, sorry the link was bad. The post on deflation is here

By: REIT Wrecks

REIT Wrecks — Tue, 23 Feb 2010 04:49:40 +0000

Well, my understanding is that they always bought the AAA piece. Did they cover the whole AAA offer, for example, on any one deal, and if so, how often did they do that?

I know they bought a big chunk of Archstone, among others like it, and they did that direct with Lehman. What was their annual volume in CMBS purchases? If they were just one of numerous bidders and not buying in great size, then it's no big deal.

If not, then I am wondering if it's worthy of a more detailed post.

David - there are some very smart people who believe in deflation. I am not all that smart, so maybe that's why I don't believe we're going to see protracted deflation.

I wrote a post on here on deflation fears, outlining the reasons why deflation fears are overstated. The comparisons to Japan are just flat out false. There's much more in the comments.

Cheers, RW

By: crabsofsteel

crabsofsteel — Tue, 23 Feb 2010 02:36:55 +0000

What more can I tell you than what I already stated? What more do you want to know? It was more Freddie than Fannie pumping worthless loans out the door. They both hold tens of billions of these multifamily-backed loans, not all of which are going to be money good. They are incentivized to refi these loans with public money, and my bet is that's exactly what they will do.

By: david

david — Mon, 22 Feb 2010 20:41:55 +0000

I think that regardless of the data put out by the government, which everyone knows is manipulated considerably, prices across all industries, including commercial real estate, will continue falling because of the reduced demand that accompanies a deflationary credit collapse. And the policy response to this has been and will continue to be money printing by Bernanke and the Fed, which are very bullish for gold. I actually came across a good article on gold stocks that discusses how certain gold companies should continue to benefit from the government's policies:

Gold Stocks (GDX) Fall – Premier Gold Mines Bucks Trend

As such, I think that while the government can keep debasing the dollar, but it can't increase the standard of living in this country over the longer term merely by printing money, as no wealth is created in doing so, therefore prices will continue to fall for all sorts of consumer goods and services.

By: REIT Wrecks

REIT Wrecks — Mon, 22 Feb 2010 19:27:57 +0000

crabsofsteel (if you please), you're right, the Fannie Mae aspect of this is interesting. Combined with the explosion of the B piece market, which they may have encouraged with these bids, and the perception that multi-family was/is the safest of the four major food groups, Fannie Mae could have played a big role in blowing up CMBS *and*, ironically, multifamily. Buying huge amounts of AAA multi-family CMBS would obviously have been a great way to satisfy their volume requirements! (aka, "fulfill their public mission")

Care to elaborate or comment?? Any additional detail would be appreciated.

By: crabsofsteel

crabsofsteel — Sun, 21 Feb 2010 14:42:48 +0000

You would have to be a student of the CMBS market to know that every deal done since the early part of last decade contained a bond backed solely by multifamily loans, typically in the low nine digits. The agencies bought these bonds as it fulfilled their residential lending charter. This robot bid incentivized multifamily lending to the point where any sane underwriting standards went out the window. Interest-only? Fine. DSCR<1 at issuance? Not a problem. British REIT buying NYC low-income housing? Back up the truck for loading. I would argue that the agencies were at the forefront of bad underwriting. The end result that multifamily loans now perform worse than loans on other property types where the agencies were not involved, with Stuy Town as the most egregious example amongst many (Bethany, Riverton Apts, Savoy Park, Lembi, etc.)

By: REIT Wrecks

REIT Wrecks — Sat, 20 Feb 2010 04:45:45 +0000

Cowboy lenders? That's a bit too strong. They're not perfect, and they did Archstone too, and like most lenders, they have their gaze fixed firmly on the rear view, but their default rate is demonstrably lower.

I'll have to confirm this, but my understanding is that the Archstone and StuyTown deals were direct deals done outside of the usual DUS process. And I'm sure they were "advised" by some intermediary who would not get paid unless the deal closed…

By: crabsofsteel

crabsofsteel — Fri, 19 Feb 2010 02:34:33 +0000

"Clearly, the old CMBS model doesn't work well, while the Fannie Mae/Freddie Mac model, which requires third party underwriters to take the first loss risk, is working much better. "

Huh? FN/FH are at risk for the Stuy Town debt. They lent most of the $3B senior debt which was CMBS-securitized. By current estimates they do not seem likely to recover 100 cents on the dollar on that loan (especially if the loan stays with the special servicer for a long time) unless they provide takeout financing with taxpayer money. It looks to me like they were cowboy lenders. There is a time lag between what they did in multifamily versus their other bad residential originations (5% of prime, etc), but I can not say for sure that they were much better than say Countrywide when it came to CRE lending.