Prior to trash talking government bonds last week, Standard & Poor’s shockingly announced that its CMBS rating model had a major bust. Many of us who still carry scars from our days as analysts and associates in I-banking were bemused by the admission and wondered why no one was sacked. The news caused spasms in the CMBS industry with one participant forecasting a “potential 20% decline in total deal volume for the remainder of the year."
In regards to S&P, perhaps we should take small comfort in that they apparently have rediscovered the holistic benefits of accurate ratings. It is as if S&P is whispering to the Department of Justice, “Just in case, on a whimsy, you intend on holding us accountable for our role in the CMBS fiasco, please see us as repentant.”
Clearly the CMBS industry demonstrated in 2011 that it no longer needed life support. GlobeSt.Com reports a CMBS pipeline of $12 billion. While the pace of underwriting began to slow in June 2011, perhaps due to a summer lag, competition for business is intense and the new “CMBS 2.0” standards are slipping fast. Loan features symbolic of the bubble (e.g. interest-only) are creeping into the CMBS pools. The current investor sentiment to allocate capital to fixed income markets augers well for CMBS momentum.
A vibrant CMBS industry is critical to the nascent US economic recovery. Healthy underwriting competition means better pricing, less vig, and greater liquidity. In many transactions, interest-only loans are highly defensible. Of course, the underwriters have obligations to bring good deals to the market and keep some “skin in the game.” And the rating agencies cannot be rubber stamping deals to collect fees. Most importantly, the buyers of these pools need to perform the requisite due diligence and understand the details of what they are buying. The buck stops with the buyer – “buyer beware!”
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