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The True State Of The CMBS Market, And Why Billions In New Writedowns Are Coming

Submitted by Tyler Durden on 03/21/2009 18:36 -0400

In response for requests for information on where the capital markets objectively evaluate commercial mortgage backed securities, and also to demonstrate the recent knee jerk reaction of how CMBX spreads ripped wider once it became clear older vintage, sub-AAA would not be eligible for TALF 1.0 participation, I am presenting the recent trading levels of CMBX 1 through CMBX 5, segregated by tranching (rule of thumb: the higher the chart line, the lower the underlying value, the more MTM pain for sellers of the CMBX tranche i.e. banks). The mid-to-late February explosion was a result of the market realizing these securities would not be eligible for taxpayer support in the TALF 1.0 version, and thus indicative of the true, and very sad, state of the commercial mortgage backed real estate market (some good intro material on CMBX here).

The annihilation in CMBX (for lack of a better word), explains the recent urgency behind the Treasury's moves to provide an iteration of TALF that will return some sense of normalcy to the CRE securitization market. The majority of CMBX tranches trade at levels which imply vast losses at low recovery values on the underlying loans.

As there are hundreds of billions in underlying notional behind the various 1 thru 5 vintages, the mark to market pain experienced by major banks and financial institutions (who would sell CMBX risk to willing purchasers) in the recent widening sprint is likely to generate another round of massive write-downs at all TARP recipients.

Also, for an indication of just how bad bank writedowns will be this quarter, a good proxy is the average levels of the various CMBX indices at Dec 31 and where they are trending now. If the current price levels persists, it will be a bloodbath.

CMBX 1