CMBS Credit Quality Shows Some ‘Echoes’ of 2007

Real Estate   |   Securities & Investment Companies   |   June 5, 2018
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Carlton Fields’ Executive Director – Financial Services, Brian Olasov, was quoted in MBA Newslink’s article, “CMBS Credit Quality Shows Some ‘Echoes’ of 2007,” discussing whether the commercial mortgage-backed securities credit quality decrease in the first quarter of the year reflects levels seen during the recent recession.

Moody’s Investors Service, New York reported that the share of interest-only (IO) conduit loans was 76.4 percent this quarter, and nearly half of the quarter’s issuance was full-term IO, uncovering metrics that were last seen around 2007.

Olasov said rating agencies are supposed to "sound the alarm" when they detect declining standards. "That's what Moody's accomplishes with this research," he said. "The rise of IO loans and full-term IO loans, in particular, is absolutely a credit negative when considered in isolation of other credit metrics."

However, Olasov also examined amortization and refinancing risk, and remarked that the data as a whole doesn’t yet indicate a return to the recession era.

“As an additional note, apart from the fact that 2007's spreads were tighter than currently, loan-to-values were higher and debt service coverage ratios were substantially lower, 2007 also had higher IO percentages — both partial and full — than we currently see in the market," Olasov said. "Today's CMBS are a long way from the ‘good old days' of 2007."

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