CMBS thought

A bank lends money with a piece of property as collateral. The borrower defaults. The lender forecloses. The foreclosure process is administered through a trustee which is a third party, generally for the maximum benefit of the bank. The trustee and bank are aligned and there is clear communication to establish an understanding of outcomes.

To me, there is a very natural and obvious problem when the singular bank above becomes plural. Very plural. Further, when this plural becomes a body of confused and conflicted parties. That is what CMBS does/did to loans, many of which are now in default.

It strikes me that a significant distinction between the defaults of the 80’s and the defaults of this period is the securitization (pluralizing and anonymizing) of the debt and debtholder. While my limited knowledge of CMBS would suggest there are people out there who “know what to do”, I think the size, scope, and complexity of this problem make it “mindbending.” By that I mean, right now, anything that has anything at all to do with CMBS is a fog of players without a clear understanding of the game they are playing. In theory, the guy the “most in the know” has a shot at taking advantage of an information advantage. The problem is, in this mindbender, the common cliche of “knowing enough to be dangerous” is an unending circular reference.

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One Response to “CMBS thought”

  1. Dark Space Says:

    I agree there will be a lot of issues that come up with so many parties involved, but it shouldn’t be catastrophic. In a CMBS deal, there is a single specified servicer that handles all performing loan, and non-performing loans get handed over to a single specified special servicer to handle workouts and foreclosures. Just like the bank, there are a number of investors in the bonds, and a Trustee that sits at the top and ensures everything is being handled correctly.

    Further, analyzing the CMBS is not much different from analyzing the bank – except in the CMBS you get to actually see all of the loans, tenants, sponsors, and all of the financial data on the underlying collateral. I’d buy CMBS over any bank, any day of the week.

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