CMSA Study Finds CMBS Market Turning Around

The economy may remain difficult, but the commercial mortgage-backed securities market has turned the corner. That was the determination of Jun Han, who performed an extensive study of the CMBS market for the Commercial Mortgage Securities Association. Han released the white paper and discussed his findings during a press conference at the organization’s annual convention yesterday. “This is the investment of a lifetime,” he declared, terming the instrument’s poor performance to a degree an unfortunate and unfounded fallout of having the word “mortgage” in its name—causing investors to automatically extend fears about the residential market’s troubles to the commercial market.“CMBS has been mispriced, given the fundamentals, given the fair value of CMBS under significant stress,” he said. The undervaluing specifically has applied to the CMBX market, against which investors have marked to market despite the fact that the CMBX market represents only a very small and thinly traded segment of the market, according to his white paper. Yet according to Han’s extensive tests of all 19,543 loans in the four CMBX indices against the credit stresses of the past 12 years and against the worst possible scenario, the 1986 recession, he found few risks of poor performance. Indeed, other studies have also turned up overall strength in the market, he noted in his paper.The CMBS market actually turned the corner with the Federal Reserve’s rescue of Bear Stearns & Co., Han said. CMBS spreads peaked in mid-March, when rumors of those problems first came to light. While it will take time for the market to recover—he hesitated to predict how long that would take but suggested six or 12 months as possibilities—he said that monetary policies now in place support the market such that it can now recover. In fact, liquidation of problem loans is already happening and it will not be difficult for banks to repair their balance sheets, he said. However, spreads will need to come down for buyers to be willing to move on deals, he cautioned.