To clarify, the chart does not start at zero but the spread widening is unprecedented AFAICT.
What this tells us is that the lender appetite for MBS of any sort is drying up.
The wording gets confusing. CR says "Most of the CMBX indices are setting new record lows again." The CMBX is really setting record highs. ~3.2 versus a mere 2.1 a month ago. The "lows" CR is talking about is sales prices to the hapless owners. N.B. CR could equally twist the fuzzy language above and claim what I just said is also reversed. Thus is the fate of an opaque financial system.
With all due respect to CR, both the label (cliff diving) and the wording (setting record lows) are confusing, especially for those of us easily confused by this stuff.
When the spreads increase - chart going up - the bond prices are going down.
...then you should take a claw hammer, extend it away from your body at arm's length & then return it with great speed so that the flat side impacts your forehead just above & between your eyes. That should solve your confusion.
Motherscratcher knows something of confusion and its solutions, apparently from experience.
It is not always the case that, "When the spreads increase - chart going up - the bond prices are going down." Even if CR blogs that it is.
Where the reference rate remains constant, then, yes: an increase in spreads does imply a decrease in the underlying bond price.
But where both the reference rate and the CMBX are declining, but the latter less quickly than the former, then the spread can increase while the bond price of both increase.
One can refer to a plot of ABX as "cliff diving" but what's being shown here (CMBX) is obviously going up in a parabolic (or exponential) trajectory. For this case, the metaphor of "cliff diving" is not appropriate--maybe "blowing up" would be better?
The suggested exercise with the hammer sounds pretty painful; I think I'll skip it.
Sharp US money supply contraction points to Wall Street crunch ahead
"The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959. "Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist." Sharp US money supply contraction points to Wall Street crunch ahead - Telegraph
Umm, if it's a spread, then isn't the spread increasing between two points? What are the points? (endpoints?) Or between what & what is the spread increasing?
I have a relative who has worked for AIG for years. I just recently found out he has most of his retirement in AIG stock. I couldn't believe anyone would do that after Enron, but I guess people love their company and think, "it's different here."
the recent dramatic action with the CMBX index could be related to the much talked about portfolio shopping by lehman. a large dump of CMBS assets on the market might lead people to take positions to adjust their portfolio based on the sale or proposed sale of these assets. also, some hedge funds, aware of the need for lehman to sell the assets, may try to manipulate the index to try to push the purchase price down for some of the bonds. it is a thinly traded index and it wouldn't be that hard to push pricing around a bit.
think anyone would be mean enough, or motivated enough, to do that?
I wonder who the bagholders will be when CRE implodes? I know that a lot of commercial construction loans are held by banks, and I hope they don't wind up in FDIC's hands. Have Fannie and Freddie been dabbling in CMBS?
Aug. 2008 - almost a year precisely after it was apparent that residential deals were blowing up, commercial deals follow suit. CRE performance seems to lag resi by a year, then and now.
The fundamental reason for this most-recent cliff-dive was that CMBS report in mid-month, and news came out about a few large loans blowing up out of left field. To answer Mr. Hand, the answer is yes, Freddie (not so much Fannie) provided a robot bid for multifamily loans. The mechanism was complicated so I won't go into it here, but robot bids create asset bubbles. By other means, they also guaranteed multifamily loans, but that accounts for a miniscule portion of their held portfolio.
Construction loans are another animal. Some were securitized mostly by GNMA. They are much more resident on bank balance sheets.
Invisible Hand, the way in which Fannie and Freddie were exposed to CMBS is as follows. A super senior class of AAA securities was created (typically designated class A-1A). This class is called the A-1A and it almost in every case was equal in size to the balance of mortgages in the portfolio that were fannie freddie eligible (mostly multifamily, though I think some assisted living and mobile home stuff qualifies as well, not 100% on that). Anyway, the principal and interest from the GSE eligible collateral was directed to pay back the A-1A bond.
The bond still has the benefit of the 30% credit support for the super senior classes so if there was a default and loss in the target collateral, the principal repayment and current interest would come from some of the non-directed collateral.
If you'd like to see this in action go to the filed prospectus linked here and start reading the waterfall on page S-15.
The fannie/freddie bid was generally executed in the context of the market so I don't believe it would be correct to call it a robot bid. The GSE bid would be firmed up in advance of most marketing to anchor the deal but they did negotiate on price. Additionally since they were buying securities with substantial credit enhancement and not whole loan exposures I wouldn't expect them to do the same level of credit work and negotiation that they would do on a whole loan portfolio.
What a lot of people do not realize about the CMBS market is that there is a gate keeper for loans getting into pools, the B-Piece buyer. The B-Piece buyer is generally unafilliated with the issuer and therefore represents real 3rd party money in the deal at the lowest credit rated tranches. The Bbuyer gets the collateral tape 6 weeks prior to the deal being issued and kicks out or re-structures loans which it does not want to take. Granted in the middle of 2006 the flood of money that started a handful of newer buyers moved negotiating power from the buyers to the seller resulted in some fairly egregious loans making it in to certain deals. However the vast majority of deals had the pools vetted by experienced investors who had real money at risk, which I think will keep us from seeing a massacre on par with what's happening in the resi securitized space.
I would advise you to read the very well written rebuttal to this in the comments. The point on physical vs. cash settle is particularly deaf to the dynamics of the market. Once this insurance triggers (which means losses in the reference) the market price of the security is going to be so low that any delta between par and par - mv will be noise. Nothing better than an equity analyst trying to understand credit. It's cute!
And he also forgot to mention, the LTV trigger levels. Well, CRE values are going down, let's assume I am a B-piece investor and I get a notification that the there is a LTV covenant breach. So what am I going to do? Unwind the whole CMBS structure and agree to a forced sell of the properties and loose my B-piece investment? No, as long as the tenants (corporates etc.) are paying their rent and I get my CF, taking into account that usually the tenant agreements are much longer than the CMBS tenor, I will just sit it out and hope when it comes to refinancing (moody reports e.g. that the major part (90%) of refinancing of the CMBS transactions they rated are due 2012 and later) that I will be in a better position.
If anybody thinks that the CMBX is reflecting the market this is just pure rubbish.
Way late in the thread but the rent $$$ complaints from NY and Cal (I'm in Chicago) inspired me to go to their Craigslists and run a price check on 2 BR apartments. Gulp. Not to make the Coasters jealous, but go to the Chicago Craigslist and search for 2 BRs in "South Loop" or "West Loop" and see what you can get for $1800 or less. My fiance and I are actually having fun with the search.
even later in the thread, Mr Sickdoom you will see whether CMBX is off base,
but trust that it is not. this is the month when CMBS have shit the bed. Mr RowdyRoddyPiper, you have some information but not enough. FH was buying A1As three years before FN gave in and did the same. My guess is that you are working for a research group. I think CMBX is correct. Will you give me YOUR money to bet otherwise?
crab - actually, you would give sickdoom your money in a cmbx bet,...you buy protection, you pay the upfront.
i will sell you protection on any of the AAA series,..just so happens they have the same credit support as the A1A.
You'ld sell me protection on a cmbx AJ series where the credit support was 11%? Depending on which deal, you're done. Is it your money you are investing?
"this is the month when CMBS have shit the bed."
"can you please clarify what this is in reference to? thanks"
No rating agency thought mentioning that 6% of a deal could be in jeopardy because Boscov's closed a bunch of stores. No one thought that Riverton Apts. was going belly up. It wasn't even on the radar because the borrower is well capitalized. Yet, they can walk away from their bad bets. Charlatan seems to be on target too.
you said you thought cmbx was correct. so i was offering to sell you protection on any of the AAA tranches.
while riverton may not have specifically been on peoples radar (i actually think it was on many radars, particularly if you owed any of that CD deal) the concept of pro forma underwriting is well documented and all pro forma loans are under a microscope since they would be (in my opinion and many others) the biggest and soonest driver of loses).
in my opinion, the only tranches with a remote possibility of being priced right in cmbx is the BBs, with decreasing probability as you move up the credit stack. BBs trading at a spread north of 3000 is a race to when/if enough losses happen to take out most/all of these tranches. for a buyer of protection to get their money back (and a reasonable return) at these levels would need a complete loss through the BB level on basically all 25 tranches within 3 yrs. could happen given market conditions and pro forma/weak underwritings as discussed,..but to date (about 1.5 yrs seasoning) these loans, while certainly weaker than historical, are not performing to that implied level.
as a general rule of thumb i typically agree with charlatan, and this goes here as well. those are all valid rational causes of spread widening. each of his items can cause spread widening in these indexs for their own reasons, but only the riverton apts could be linked to fundamentals on the deals themselves. but i dont think riverton apts caused a fundamental trade here (again, pro forma is well documented), but rather it caused a momentum directional trade.
either way, will be interesting to see how the cmbx levels and actual losses wind up
thanks for doing the homework. Are you still offering to sell me protection?
Boscov's are typically not standalone big box, but if you use the Kmart closings from 02 as any guide, recoveries will be pitiful.
When something is quoted at 30% over anything, yields become meaningless.
i presonally wouldnt use Kmarts as a comp for losses,..these properties are typically in large malls/shopping centers, just happen to be loans on singel tenant props for whatever silly reason. not the same as a stand alone beater kmart. looking at fitches bonds on downgrade watch, seems i am not alone in thinking losses wont be kmart bad,..values on some of the properties i looked at were in the 29mm area, with loans in the 19mm area, so low 60s LTVs.
i will definitely sell you protection,..all day. question would be if you would be willing to pay market prices
for fun, lets say i sold you protection on the AJ from that BACM 06-3 deal, and because i am so kind, i will even sell an adversly selected single name such as this at the low low price of AJ CMBX (520 spread today). unquestionably a deal for you
now heres what you need to have happen to make money on your trade,..losses (thats losses, not deliquencies) need to exceed 16% for you to make more than a libor return on your money after 10 yrs. or if you think they happen sooner, 13% losses.
so to put these loss levels in perspective, you need another 6 or 7 Boscovs equivalents to specifically happen in your deal just to break even. or in other terms, you need 30% delinquencies and a 50% severity just to break even.
while you may end up being right, i like my odds of making money on the trade
You are indeed kind and thoughtful, and thanks for explaining. You are also articulate and I think people learn easily from you. If only we weren't the only two left here, that is.
About your trade, I am tempted. Although it seems exaggerated to expect 6 Boscov's, there is bad news galore in all property types. It only takes one really bad deal to ruin it for everyone. Today, I noticed a 23MM office loan made by Countrywide to Wextrust in a MLCFC deal. Wextrust was just shut down by the FBI, for running a Ponzi scheme. Countrywide underwrote 30% of the deal. Don't you have to wonder about the quality of their other loans? I do. Right there is your 30%. 4 other loans in the deal are already with the special servicer. Although percentage-wise that's small, it's still unusual for what it essentially a new deal.
There are others that are even worse. IQ11? GG7? How would you feel about single-names on the AJs in these? Pro forma underwiting? Resets after interest-only periods? I've seen what a recession does to CRE and in 9 months, I think you'll regret that trade.
It will continue until it ends.
Looks more like the trampoline event at the Olympics...
See the AIG story at nakedcapitalism
Goldman Sounds Alarm on AIG « naked capitalism
Right on time with the market's next leg down - booya!
I was wondering when this would be noticed.
To clarify, the chart does not start at zero but the spread widening is unprecedented AFAICT.
What this tells us is that the lender appetite for MBS of any sort is drying up.
The wording gets confusing. CR says "Most of the CMBX indices are setting new record lows again." The CMBX is really setting record highs. ~3.2 versus a mere 2.1 a month ago. The "lows" CR is talking about is sales prices to the hapless owners. N.B. CR could equally twist the fuzzy language above and claim what I just said is also reversed. Thus is the fate of an opaque financial system.
Rising CMBX == bad for orderly markets.
With all due respect to CR, both the label (cliff diving) and the wording (setting record lows) are confusing, especially for those of us easily confused by this stuff.
O mighty CMBX please keep rising. Please provide inspiration for my fallen SRS to rise with you.
If this confuses you:
When the spreads increase - chart going up - the bond prices are going down.
...then you should take a claw hammer, extend it away from your body at arm's length & then return it with great speed so that the flat side impacts your forehead just above & between your eyes. That should solve your confusion.
Good day sir!
Research Recap » Blog Archive » CMBX Index Causing Commercial Real Estate Capital to Dry Up
It seemed like it took forever for the housing prices to crack.
Same thing with CRE. I think once CRE prices start to fall, things will accelerate.
Motherscratcher knows something of confusion and its solutions, apparently from experience.
It is not always the case that, "When the spreads increase - chart going up - the bond prices are going down." Even if CR blogs that it is.
Where the reference rate remains constant, then, yes: an increase in spreads does imply a decrease in the underlying bond price.
But where both the reference rate and the CMBX are declining, but the latter less quickly than the former, then the spread can increase while the bond price of both increase.
Now go fetch your hammer, Motherscratcher....
MotherScratcher,
One can refer to a plot of ABX as "cliff diving" but what's being shown here (CMBX) is obviously going up in a parabolic (or exponential) trajectory. For this case, the metaphor of "cliff diving" is not appropriate--maybe "blowing up" would be better?
The suggested exercise with the hammer sounds pretty painful; I think I'll skip it.
Goodbye F & F. Hello taxpayers.
I've missed these!
Welcome back ole cliff diving charts....
..........
So how do you make money on the CMBX blowing up?
Sharp US money supply contraction points to Wall Street crunch ahead
"The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959. "Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist."
Sharp US money supply contraction points to Wall Street crunch ahead - Telegraph
So first we have a bad inflation and then we have a bad deflation?
Producer prices up a lot.
Just temporary, unless everybody stops buying anything?
Lawyer liz, I passed the bar also.
I coined the word "HYPERDEFLATION" a few years ago in the Financial Times.
I think it's a tail risk we need to manage.
Tony
Tony--hehehehehehe
CMBX is pointing towards the heavens. As if the hand of god could somehow stop this train wreck now...
Irony?
Umm, if it's a spread, then isn't the spread increasing between two points? What are the points? (endpoints?) Or between what & what is the spread increasing?
I have a relative who has worked for AIG for years. I just recently found out he has most of his retirement in AIG stock. I couldn't believe anyone would do that after Enron, but I guess people love their company and think, "it's different here."
the recent dramatic action with the CMBX index could be related to the much talked about portfolio shopping by lehman. a large dump of CMBS assets on the market might lead people to take positions to adjust their portfolio based on the sale or proposed sale of these assets. also, some hedge funds, aware of the need for lehman to sell the assets, may try to manipulate the index to try to push the purchase price down for some of the bonds. it is a thinly traded index and it wouldn't be that hard to push pricing around a bit.
think anyone would be mean enough, or motivated enough, to do that?
I wonder who the bagholders will be when CRE implodes? I know that a lot of commercial construction loans are held by banks, and I hope they don't wind up in FDIC's hands. Have Fannie and Freddie been dabbling in CMBS?
Aug. 2008 - almost a year precisely after it was apparent that residential deals were blowing up, commercial deals follow suit. CRE performance seems to lag resi by a year, then and now.
The fundamental reason for this most-recent cliff-dive was that CMBS report in mid-month, and news came out about a few large loans blowing up out of left field. To answer Mr. Hand, the answer is yes, Freddie (not so much Fannie) provided a robot bid for multifamily loans. The mechanism was complicated so I won't go into it here, but robot bids create asset bubbles. By other means, they also guaranteed multifamily loans, but that accounts for a miniscule portion of their held portfolio.
Construction loans are another animal. Some were securitized mostly by GNMA. They are much more resident on bank balance sheets.
"Have Fannie and Freddie been dabbling in CMBS?"
Invisible Hand, the way in which Fannie and Freddie were exposed to CMBS is as follows. A super senior class of AAA securities was created (typically designated class A-1A). This class is called the A-1A and it almost in every case was equal in size to the balance of mortgages in the portfolio that were fannie freddie eligible (mostly multifamily, though I think some assisted living and mobile home stuff qualifies as well, not 100% on that). Anyway, the principal and interest from the GSE eligible collateral was directed to pay back the A-1A bond.
The bond still has the benefit of the 30% credit support for the super senior classes so if there was a default and loss in the target collateral, the principal repayment and current interest would come from some of the non-directed collateral.
If you'd like to see this in action go to the filed prospectus linked here and start reading the waterfall on page S-15.
http://edgar.sec.gov/Archives/edgar/data/1358878/000095013606004261/file001.htm
The fannie/freddie bid was generally executed in the context of the market so I don't believe it would be correct to call it a robot bid. The GSE bid would be firmed up in advance of most marketing to anchor the deal but they did negotiate on price. Additionally since they were buying securities with substantial credit enhancement and not whole loan exposures I wouldn't expect them to do the same level of credit work and negotiation that they would do on a whole loan portfolio.
What a lot of people do not realize about the CMBS market is that there is a gate keeper for loans getting into pools, the B-Piece buyer. The B-Piece buyer is generally unafilliated with the issuer and therefore represents real 3rd party money in the deal at the lowest credit rated tranches. The Bbuyer gets the collateral tape 6 weeks prior to the deal being issued and kicks out or re-structures loans which it does not want to take. Granted in the middle of 2006 the flood of money that started a handful of newer buyers moved negotiating power from the buyers to the seller resulted in some fairly egregious loans making it in to certain deals. However the vast majority of deals had the pools vetted by experienced investors who had real money at risk, which I think will keep us from seeing a massacre on par with what's happening in the resi securitized space.
"See the AIG story at nakedcapitalism"
I would advise you to read the very well written rebuttal to this in the comments. The point on physical vs. cash settle is particularly deaf to the dynamics of the market. Once this insurance triggers (which means losses in the reference) the market price of the security is going to be so low that any delta between par and par - mv will be noise. Nothing better than an equity analyst trying to understand credit. It's cute!
-riverton apartments, NYC
-lehman sale failing to get desired prices and related hedges put
-quarter-end hedging for IBs
RowdyRoddyPiper is absolutely right.
And he also forgot to mention, the LTV trigger levels. Well, CRE values are going down, let's assume I am a B-piece investor and I get a notification that the there is a LTV covenant breach. So what am I going to do? Unwind the whole CMBS structure and agree to a forced sell of the properties and loose my B-piece investment? No, as long as the tenants (corporates etc.) are paying their rent and I get my CF, taking into account that usually the tenant agreements are much longer than the CMBS tenor, I will just sit it out and hope when it comes to refinancing (moody reports e.g. that the major part (90%) of refinancing of the CMBS transactions they rated are due 2012 and later) that I will be in a better position.
If anybody thinks that the CMBX is reflecting the market this is just pure rubbish.
Way late in the thread but the rent $$$ complaints from NY and Cal (I'm in Chicago) inspired me to go to their Craigslists and run a price check on 2 BR apartments. Gulp. Not to make the Coasters jealous, but go to the Chicago Craigslist and search for 2 BRs in "South Loop" or "West Loop" and see what you can get for $1800 or less. My fiance and I are actually having fun with the search.
even later in the thread, Mr Sickdoom you will see whether CMBX is off base,
but trust that it is not. this is the month when CMBS have shit the bed. Mr RowdyRoddyPiper, you have some information but not enough. FH was buying A1As three years before FN gave in and did the same. My guess is that you are working for a research group. I think CMBX is correct. Will you give me YOUR money to bet otherwise?
what are people doing in the CR comment section that know what they are talking about?
this area is strictly reserved for conjecturing only.
riverton apts,..ouch.
crab - actually, you would give sickdoom your money in a cmbx bet,...you buy protection, you pay the upfront.
i will sell you protection on any of the AAA series,..just so happens they have the same credit support as the A1A.
crab
"this is the month when CMBS have shit the bed."
can you please clarify what this is in reference to? thanks
es,
You'ld sell me protection on a cmbx AJ series where the credit support was 11%? Depending on which deal, you're done. Is it your money you are investing?
"this is the month when CMBS have shit the bed."
"can you please clarify what this is in reference to? thanks"
No rating agency thought mentioning that 6% of a deal could be in jeopardy because Boscov's closed a bunch of stores. No one thought that Riverton Apts. was going belly up. It wasn't even on the radar because the borrower is well capitalized. Yet, they can walk away from their bad bets. Charlatan seems to be on target too.
What are you thinking?
you said you thought cmbx was correct. so i was offering to sell you protection on any of the AAA tranches.
while riverton may not have specifically been on peoples radar (i actually think it was on many radars, particularly if you owed any of that CD deal) the concept of pro forma underwriting is well documented and all pro forma loans are under a microscope since they would be (in my opinion and many others) the biggest and soonest driver of loses).
in my opinion, the only tranches with a remote possibility of being priced right in cmbx is the BBs, with decreasing probability as you move up the credit stack. BBs trading at a spread north of 3000 is a race to when/if enough losses happen to take out most/all of these tranches. for a buyer of protection to get their money back (and a reasonable return) at these levels would need a complete loss through the BB level on basically all 25 tranches within 3 yrs. could happen given market conditions and pro forma/weak underwritings as discussed,..but to date (about 1.5 yrs seasoning) these loans, while certainly weaker than historical, are not performing to that implied level.
as a general rule of thumb i typically agree with charlatan, and this goes here as well. those are all valid rational causes of spread widening. each of his items can cause spread widening in these indexs for their own reasons, but only the riverton apts could be linked to fundamentals on the deals themselves. but i dont think riverton apts caused a fundamental trade here (again, pro forma is well documented), but rather it caused a momentum directional trade.
either way, will be interesting to see how the cmbx levels and actual losses wind up
best
crab
"No rating agency thought mentioning that 6% of a deal could be in jeopardy because Boscov's closed a bunch of stores."
where did you get the 6% number from?
best
think i found out where you got that number and where i was thrown off
BACM 06-3 deal has 117mm in related loans,...6% of the deal. i was thinking 6% potential loss for whatever reason, knew i hadnt seen that.
best
es,
thanks for doing the homework. Are you still offering to sell me protection?
Boscov's are typically not standalone big box, but if you use the Kmart closings from 02 as any guide, recoveries will be pitiful.
When something is quoted at 30% over anything, yields become meaningless.
i presonally wouldnt use Kmarts as a comp for losses,..these properties are typically in large malls/shopping centers, just happen to be loans on singel tenant props for whatever silly reason. not the same as a stand alone beater kmart. looking at fitches bonds on downgrade watch, seems i am not alone in thinking losses wont be kmart bad,..values on some of the properties i looked at were in the 29mm area, with loans in the 19mm area, so low 60s LTVs.
i will definitely sell you protection,..all day. question would be if you would be willing to pay market prices
for fun, lets say i sold you protection on the AJ from that BACM 06-3 deal, and because i am so kind, i will even sell an adversly selected single name such as this at the low low price of AJ CMBX (520 spread today). unquestionably a deal for you
now heres what you need to have happen to make money on your trade,..losses (thats losses, not deliquencies) need to exceed 16% for you to make more than a libor return on your money after 10 yrs. or if you think they happen sooner, 13% losses.
so to put these loss levels in perspective, you need another 6 or 7 Boscovs equivalents to specifically happen in your deal just to break even. or in other terms, you need 30% delinquencies and a 50% severity just to break even.
while you may end up being right, i like my odds of making money on the trade
best
es,
You are indeed kind and thoughtful, and thanks for explaining. You are also articulate and I think people learn easily from you. If only we weren't the only two left here, that is.
About your trade, I am tempted. Although it seems exaggerated to expect 6 Boscov's, there is bad news galore in all property types. It only takes one really bad deal to ruin it for everyone. Today, I noticed a 23MM office loan made by Countrywide to Wextrust in a MLCFC deal. Wextrust was just shut down by the FBI, for running a Ponzi scheme. Countrywide underwrote 30% of the deal. Don't you have to wonder about the quality of their other loans? I do. Right there is your 30%. 4 other loans in the deal are already with the special servicer. Although percentage-wise that's small, it's still unusual for what it essentially a new deal.
There are others that are even worse. IQ11? GG7? How would you feel about single-names on the AJs in these? Pro forma underwiting? Resets after interest-only periods? I've seen what a recession does to CRE and in 9 months, I think you'll regret that trade.
back to spongebob,
crabs