The Gift that Keeps on Giving

During the discussions about the Fannie Mae project I still regret having turned down, one of the topics was which security would be better for a portfolio (assuming their risk-adjusted prices provided the same value): a four-year-old MBS or a seven-year-old MBS?

I noted that the four-year-old MBS provided more potential upside but came gradually to agree that the seven-year-old security was preferable: an MBS that is that “seasoned” is effectively a generic amortizing bond. There shouldn’t be any surprises—in either direction—so a portfolio manager would prefer it.

As usual, The Old Firm manges to prove that what should be correct for an MBS isn’t necessarily so for a CMBS:

Standard & Poor’s Ratings Services today lowered its ratings on
three classes of commercial mortgage pass-through certificates from Bear
Stearns Commercial Mortgage Securities Trust 2002-TOP6, a U.S. commercial
mortgage-backed securities (CMBS) transaction….

The downgrade of class M to ‘D’ follows a principal loss sustained by the
class, which was detailed in the August 2010 remittance report….

The principal loss and corresponding credit support erosion resulted from the
liquidation of an asset….The Nortel Networks asset is a 281,758-sq.-ft. office
property in Richardson, Texas. The asset had a total exposure of $28.6
million. The asset was transferred to the special servicer in September 2009
and became real estate owned (REO) in March 2010. The trust incurred a $12.0
million realized loss when the asset was liquidated during the August
reporting period…[T]he loss severity for this asset was 44.2%

As corporations are increasingly using “jingle mail,” the prospect for the future of CMBSes—even those that went through several good years. Or for the concept of an “ongoing concern,” or a strong recovery. (That latter concept seems to fade with each passing day.)

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