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Wednesday, July 29, 2009

Commercial Mortgage Backed Securities (CMBS)

By now, most Americans who read a newspaper or watch a real news program know the term "MBS" or "Mortgage backed Securities". When these are referred to, it typically represents home loans repacked into a bond/security. These things have been discussed on this blog before. The main problem is, they are not based on market value, but on fictitious valuations through computer models, and where and many still are rated AAA.

Enter a new term for me, CMBS, or "Commercial Mortgage Backed Securities". These read to be the same as MBS but the commercial sector is the basis for the securities. I don't fully understand the profile of these instruments, but my gut tells me they would have been championed as even more trustworthy than mere MBS.

Enter a company called Realpoint. Realpoint is a nationally recognized credit-rating agency that proclaims it's goal is to increase market transparency and provide investors with the highest quality ratings and analysis by offering a wide array of securities research, surveillance services, data, and technology solutions.

This company provides a market research report, publicly, on the state of CMBS, and is available here (click). It's latest report on over 800 Billion CMBS it reviews is not good. A full report can be found by clicking here for July 09.

From WebSurfinMurf's Financial Blog

Realpoint projects 6% to possibly 8% default rate on the 800 Billion CMBS it reviews by Dec 2009. That is about a double from the June rate! The June 2009 default is 700% (7 times) increase from one year ago. (as shown in graph above). The total US CMBS securities is at 1.2 trillion dollars, and total in world (including USA) is 1.6 trillion. Assuming the total CMBS of 1.2 Trillion experiences the default rate of 7%, total in default will be 84 Billion. If same trajectory is kept, which I hope it won't be, 2010 will be a debacle. CMBS is 1.2 trillion, and this doesn't include other commercial mortgages not secure-itized. I doubt CMBS will be a major factor in financial losses. However it is yet another indicator that the economy is sick.

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