Monday, January 11, 2010

Comings and Goings

Peter Cooper/Stuy Town is finally defaulting on their mortgage after much anticipation. Five different CMBS deals have exposure, and are gearing up for their shortfalls.

One, unnamed*, journalist got it right. She didn't get a byline, maybe I should know who she is, but I'm going to dub her "Samantha's Mom". As we've said all along - the CRE problems are much worse on bank's balance sheets than in CMBS.

CMBS is going to rally in 2010, and it's going to be huge!

I'm just embarrassed for the Fed and how they've done pretty much everything. They screwed up TALF, again. Did you know the fed was a private enterprise that can be hired/fired by Congress? Should you be asking your Congressman to let go this wayward contractor?

*It's Agnes Crane - I just think it's weird she doesn't have a byline.


crabsofsteel said...

I can't believe you buy this.

"Commercial mortgage bonds in general are also far from subprime. Barclays Capital estimates losses on 2007-vintage bonds at 16 percent, well below the 53 percent seen for subprime residential loans made the same year."

1 - You can't compare comm'l and resi loans made the same year. Comm'l lags by at least a year.

2 - Barclays was telling people to load up on AJs last year, only to see them almost universally get downgraded.

3 - Their estimate of 16% losses on 2007 vintage CMBS is ridiculous, considering that the underlying (all vintages) is down 44%. How can that make any sense?

4 - The same players and the same market forces were involved in CMBS as were involved in subprime. Why would you expect a different outcome?

By year-end 2010, trust that you will be singing a different tune.

Concrete Jungle said...

1 - I don't think you should compare CRE with resi, but I don't think CRE losses on any vintage to hit 53 percent either. That Barclays estimate of 16 percent is more accurate than ANY other estimate that I've seen published - Moody's says 5.1%, Goldman was saying 5%, JPMorgan & Citi & BAML were all under 10%.

2 - when last year? If they were buying AJs in February of last year, they look like rock stars today. The value has doubled or tripled and their getting cash flow yields of 30% paid out monthly. Even if they bought crappy AJs, they will continue to look like rockstars for some time to come.

I personally heard folks at the time saying, 'buy preferred bank equities - it's a no-brainer'. WHAT? didn't we just take over Fannie and Freddie and lose a few gigantic financial firms?!? However, CMBS at the time really was a no-brainer. It's not a no-brainer now, but just because a shitstorm is coming doesn't mean there is value. I'll pay you 4 cents all day long for something that is worth 8 cents, and I could care less if you're losing 96 cents on the trade because bought it 2 years ago at par.

3 - You mean that prices are down 44%. The average LTV of a 2007 vintage loan was 69.7%, so that actually makes their estimate look pretty accurate, except of course not EVERY loan will default.

4 - CMBS obviously had its problems, but different players and different structural features. Nobody in Subprime was questioning "AAA" ratings in 2004 & 2005 and demanding higher subordination rates - this was happening in CMBS. Subprime borrowers didn't have mortgages 20 years ago - the CRE mortgages have always been there. CMBS doesn't even have the worst borrowers, it's a mix. Subprime - the entire sector was specifically made up of people who formerly did not qualify for credit...

If you truly believe losses are going to get to 53% in CMBS - I want to see the research and data behind it. I truly find that unbelievable. I think they'll be horrific, much worse than the RTC days, but not 53%. Likely less than 16%, at least on average, although specific deals are likely to top that.

I didn't actually read the Barclays piece though - I'm not on their distro for some reason. Know a salesperson there?

crabsofsteel said...

nice points, allow me to reply.

1 - Barclays' estimate may be the most accurate because it is the highest, but remember that these are all sell-side estimates. All these guys are long CMBS, so would you expect to see research publish an estimate of 20-30%? The trading desks would have their skins if they did. My thoughts are a little different. 2007 deals were 70% super senior AAA with 30% in protection. So prices were bid up by .70x30% to get that protection, and that's what I expect to see in losses. There are 07 deals already 25%+ specially serviced 2.5 years after issuance; it's not unreasonable to think that they'll see 20%+ in losses over 10 yrs.

2 - That AJs have doubled is in part the effect of TALF happy juice and the general tightening of credit spreads. I've been through the Jan. data and it isn't pretty. Coming up this year and beyond are loan maturities and period-IO resets. When appraisal reductions kick in and AJs stop cashflowing, attitudes will change.

3 - I intended to say that prices are down 44%. If the average LTV was ~70% for 2007 vintage loans, every loan is now underwater. They could all transfer, especially now that it is easier to do so. They will not get refi'd at 100% LTV, so there's no LTV cushion. Let's be kind and say they do get refi'd at 70% LTV. You're still looking at a 40%+ loss. Add in reimbursement of servicer advances and fees for the special and losses hit 60-70%, which empirical data confirms.

4 - I didn't say CMBS would see 53% loss rates. Instead I stated that the incentives were the same to package garbage loans, so the outcomes may be similar. The mechanisms for disguising risk were different than in subprime but they were certainly there. Pro-forma underwriting, period IOs which were rated as if they were amortizing loans, masking borrower concentrations by splitting large loans up, not disclosing the borrower's identity, etc. The GSEs were also providing mortgage money to crackhead borrowers for multifamilies.

Take Stuy Town as an example, a $3BB senior loan. Not a subprime borrower, but current opinions are $1.8BB or less. That's a 40% loss right there. The same originator swung for the fences on every loan they made, in order to become top dog.

Trust that I wish you could prove me wrong. But I've been through this before when BBB spreads blew out. This time, it's AAAs.