Dark Space

CMBS: Still Melting

The are some important takeaways. Everyone thinks that malls will suffer as more and more retail tenants fail, and office space will suffer as more folks are laid off, and at the end of the day a lot of loans were underwritten poorly and will fail. Not only does everyone know it, but we have for awhile - the two big CMBS delinquencies on the front pages last week were expected to fail by many as soon as they showed up in the deal.

The 30% AAAs in CMBS is strong protection, even taking into account all the weak factors. If every mortgage defaults and the properties are sold for 50% of the value their previous owner paid, then, and only then, do these begin to take some losses. So, to compare to the great depression... To borrow from someone else's work a little, you need to pick the worst 10-year period from the great depression (because CMBS bonds are 10-year bonds), and you get a 29% default rate on a group of unsecured and secured corporate debt. That is a proxy, and doesn't include recoveries. If you assume that there were $0 in recoveries (which is not accurate), the AAAs still do not take losses.