Rejected CMBS looks stressed out

July 23, 2009

More on the CMBS deal rejected by the Fed under its TALF program:

The deal has above-average stress points when compared with those that were accepted. According to Bank of America’s breakdown, 90-day plus delinquencies, for example, were at 3.2% compared with the 1.27% average of those accepted. The highest delinquency rate of those accepted, however, was 4.41%.

Looking at the underlying collateral is where the fun really starts.

At the time the deal was put together in March 2007, Moody’s Investors Service noted that 79% of the loans in the pool backing this class and others had loan-to-value ratios over 100%. Talk about easy lending! Additionally, 78% of the loans pay only interest for the entirety of the loan, leaving a big balloon payment at the end.

The loans, 229 in all, were originated in the previous 12 months, so essentially at the peak of crazy lending standards.

The face value of the bond is $688.9 million, so I’m guessing its market value is much, much less since the total loan applications were only for $669 million. Sure there’s the Fed’s haircut, but still.

On the Fed haircuts:

The base dollar haircut for each legacy CMBS with an average life of five years or less will be 15% of par. For legacy CMBS with average lives beyond five years, base dollar haircuts will increase by one percentage point of par for each additional year (or portion thereof) of average life beyond five years.

The Fed isn’t talking about the reasons for putting the kaboosh on this deal, but the underlying collateral is enough to make anyone want to run away.

In February, Moody’s affirmed the AAA ratings on this particular tranche of the pool, but downgraded 23 other classes due to increased leverage, reduced debt service coverage and anticipated losses from loans already in special servicing.

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Moody’s LTV is not very realistic – they use historical cap rates to estimate the LTV on the loan. Obviously property values have fallen, but the actual original LTV on this deal based on appraisals was closer to 70%. Moody’s LTV, like their ratings, is kind of made up.

Further, most CRE loans are IO, so that is not a surprise. IOs make a lot of sense in commercial real estate in particular, but even in residential real estate it is defensible for savvy borrowers. Partial IOs seem like a much bigger problem.

The rating agencies are idiots though, anyone basing an investment decision based on their ratings should be fired. S&P downgraded a similar bond to BBB from AAA and back up to AAA within a week!