Dark Space

CMBS Markets Are Bid-Only, Which Bodes Badly

First, A-rated CMBS do not have 30% subordination rates, they're closer to 10%, typically, but range from 8 - 12%. The subordination rate represents how much losses the pool has to incur before the bond in question takes a dollar of principal loss.

Further, losses in the worst 10 years of the Great Depression on CORPORATE debt (not secured senior mortgages) did not exceed 25%, over 10 years. Do you think losses on senior mortgages will exceed losses on the worst 10-years of the Great Depression on corporate bonds? If so, you're in a small minority. Most knowledgeable analysts are pegging losses in the CMBS world to average about 10%, or less - some, who I believe are wrong, are as low as 5% (Moody's, Goldman). Since 1972, the worst 10-year cumulative loss rate was 8.1% from 1986 until 1995 (mostly in the early 90s).

Not to drone on about inconsistencies, but the AJ bonds shown in your chart were originally AAA-rated, though they've been downgraded to all kinds of levels, no one refers to them as As. Although their subordination rate is typically closer to 13%, that is where they experience their first loss - their last loss (i.e. you lose all your money) is at 20% - so there is a lot of room there. I'd argue that AJs are a little rich now too, but not due to credit fundamentals. The big mispricing is due to liquidity - I'll be proven wrong next week when PPIP comes in and fills that gap taking prices up another 10 or 20 points.

Hartford Financial's Risks and Alternatives

I think you misunderstood me. I've seen their portfolio - it's publicly available. All insurance companies have mostly AAA - AA bonds just based on their RBC ratios that greatly penalize them if they dip below that. But, obviously not all AAAs are the same. They have the largest holding of any other insurance company of small balance CMBS deals - these are the worst performers to date, and sure they're rated AAA, but obviously I'd rather own a AAA CMBS backed by Office Towers (even in this FIRE driven unemployment) than one backed by Dentist's offices in rural towns and suburbs with part of the collateral backed by the sponsor/occupants lake house.

I was not implying that they had more BBBs than other insurers, I'm implying that the AAAs they own are not really AAAs, and of the AAA universe, they bought the worst possible ones!

I read their presentation when it came out - it had some errors in it as well.
-Dark Space

On Mar 07 09:12 PM Tom Armistead wrote:

> Dark Space, according to Hartford's 4Q 2008 presentation, 90% of
> their CMBS is AAA or AA, with a rated average credit protection of
> 21%. 5% of the underlying collaterarl matures in the next year.
> Under the circumstances, I question your assertions.
>
> zcharles, I don't blame the short-sellers for their actions any more
> than I would blame a rabid dog for biting me. It's in their nature
> to be perversely harmful, they can't help it.
>
> raytayz and Parpergains, agree the risk from credit rating agencies,
> harsh, arbitrary and inconsistent, is really the worst part of this
> situation, the rest is comprehensible.

Why Are Stress Tests So Pessimistic on Commercial Real Estate?

Total outstanding CRE debt is $3.9 trillion - it is in the Fed's flow of funds report every quarter. It conflicts with your numbers in the last paragraph if I understand it correctly - can you clarify?

StoneFox Capital is correct. Defaults in commercial real estate are not tied to price except at maturity - so a loan that matures in 10-years, could care less if it is underwater so long as it is cashflowing. The assertion that prices have dropped 20 - 30% doesn't tell you much - most of the loans are still worth par even given those price declines because LTVs were high enough. Drop it down another 20 - 30%, then look at the mortgages maturing and mark them down (most of the ones maturing in the next few years are short-term floaters on bank portfolios). None of this tells you anything about your shopping center down the street with a maturity date in 2016.

MarkitWacha - Texas is one of the worst performing states in commercial real estate. I know everything is bigger and better there, but that's just how it is.

Are We Headed for a Commercial Property Catastrophe?

I agree, but to put a few of the numbers in context. $250 billion in CRE losses, doesn't even rival the 1990s problems. There are $3.5 trillion in outstanding CRE mortgages according to the FED, so that is just around 7.1% losses -- fixed-rate ACLI mortgages had a 8.1% cumulative loss in the 1990s. I think it will be higher than $250 billion - that is way too low considering the amount of transitional CRE loans on banks' books and the proforma & partial IOs in CMBS...

The government is only buying the 20% subordinated bonds and higher in CMBS - I don't expect any losses in these classes, especially at today's prices. That would imply cumulative losses of greater than 20% (again 1986 vintage was 8.1%, so 2.5x the worst 10-years in the last half century). The Great Depression resulted in losses on unsecured debt in the low to mid-20s, on corporate bonds - even there you only dig into the 20% subordinated AAAs a little, and not at all given your low price-entry.

Have you seen where the banks are marking their CRE holdings? All the big ones are holding them at, or near, 100% of their face value. Who is going to sell at a more distressed price when they can just mark to cost? I haven't figured out their incentive to sell...

Covered Call Option Writing Strategies: Fishing and Cutting Bait

Until you can do this trade in any size, DPO seems to get the job done. There are a few other similar ETFs, but DPO follows the DJIA which you use.

Hartford Financial's Risks and Alternatives

The problem with HIG's CMBS portfolio is twofold. They haven't marked it down enough compared to where other CMBS are trading due to the huge vacuum of buyers. AND, they managed to consistently by the absolute worst CMBS deals that came out of the gate - which is contrary to most insurers who are more real estate savvy, and bought the better deals, and high in the capital structure.

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.