Commercial mortgage backed securities: resurgence or demise?
| DOI | https://doi.org/10.1108/14635781011080276 |
| Pages | 398-419 |
| Published date | 28 September 2010 |
| Date | 28 September 2010 |
| Author | Jenniffer Solomon,William McCluskey |
| Subject Matter | Property management & built environment |
Commercial mortgage backed
securities: resurgence or demise?
Jenniffer Solomon
Remit Consulting GmbH, Berlin, Germany, and
William McCluskey
School of the Built Environment, University of Ulster, Jordanstown, UK
Abstract
Purpose – The main purpose of this paper is to reflect on the impact of the financial crisis of 2007 on
commercial mortgage backed securities (CMBS) and to consider how market confidence in this form of
financing can be re-established.
Design/methodology/approach – The paper uses a two-stage approach involving a questionnaire
and structured interviews. The questionnaire was distributed to market participants in Europe with
the goal of identifying their views on the future of CMBS. Structured interviews were held with the
three largest credit rating agencies again with the purpose to illicit their opinions on steps necessary to
create the confidence in this innovative financing tool.
Findings – The empirical results show that market revival will depend on a simplification of deal
structures and transparency by all market players. It is clearthat regulation of the CMBS instrument is
not a top priority for the main market players, but rather, better and more open risk assessment,
greater disclosure of information and more due diligence on behalf of investors are seen as crucial.
Practical implications – The paper finds that there are several pragmatic changes that have to be
introduced into the way CMBS are designed if they are to be, once again, significant tools for the
securitising loans underlying real estate assets.
Originality/value – As well as the practical applications of this analysis it makes an academic
contribution in relation to the perceptions of the main market players in creating the environment for a
resurgence of CMBS.
Keywords Property, Investments, Securities,Finance
Paper type Research paper
1. Introduction
One of the consequences of the financial market turbulences resulting from the
sub-prime crisis in 2007 has been a freeze of the commercial mortgage backed
securities (CMBS) market. CMBS have turned into one of the scapegoats of the crisis, in
spite of their original creation as a solution to liquidity squeezes and despite the crisis’
origins in the residential mortgage market. The question therefore arises, what would
be necessary for the CMBS market to unfreeze again. The OECD Glossary of Statistical
Terms provides the following definition of contagion:
Contagions are disturbances in financial markets in one country or region triggering off a
financial crisis in other countries and regions (OECD, 2002).
In the context of the current financial crisis, contagion also refers to the disturbance in
one asset class triggering off a crisis in other asset classes. The high default rate of
mortgages in US sub-prime residential mortgage backed securities (RMBS) thus has
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JPIF
28,6
398
Received November 2009
Accepted May 2010
Journal of Property Investment &
Finance
Vol. 28 No. 6, 2010
pp. 398-419
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781011080276
been an often-quoted disturbance for the initial trigger of the current crisis concerning
all structured finance products.
This paper will set out to investigate the main causes of the CMBS crisis and to
consider the future role of regulation for the viability of the European CMBS market in
order to test the hypothesis that “CMBS as a refinancing tool will only survive the
current financial crisis with stricter regulation”.
Because of their original design to fight liquidity shortages, the structure and
characteristics of CMBS transactions do not seem to be a logical cause for the current
problems. The main research objective therefore is the analysis of CMBS
characteristics, including the role of its market participants, which influence the
tool’s attractiveness, especially in times of crises. This analysis should result in the
detection of problematic areas that might need adjustment via regulation.
Finally, research into the necessary changes to regulation via questionnaires and
structured interviews to revive the CMBS market in times of a financial crisis is
undertaken. Consequently, the findings should not only assist in the testing of the
hypothesis but also in the attainment of specific ideas and recommendations for the
future of the CMBS market.
The remainder of the paper will be structured as follows: section 2 will address the
main literature surrounding the topic; section 3 will outline the research methodologies
employed to test the main reasons for the collapse in CMBS; section 4 will describe the
structure of the CMBS market, participants and rating agencies; section 5 will identify
the possible reasons for its decline; section 6 will provide the results of the
questionnaire and interviews; and, finally, section 7 will draw some conclusions and
recommendations.
2. Literature review
Unlocking the illiquidity of real estate to a large extent can be achieved through
innovative financing tools such as securitisation (Chan et al. 1998; Jennings, 1993;
Venmore-Rowland, 1991). Real estate securitisation can be asset-based or
loan-/mortgage-based with both being predicated on the receipt or payment of a
predictable and dependable income streams i.e. rents or loan payments (Newell and
Fife, 1995). Most securitisations and REIT-based transactions are secured on physical
real estate assets and for a review of this type of property securitisation see Corgel et al.
(1995), Capozza and Lee (1995); Redman and Manakyan (1995); Jennings (1993); Khoo
et al. (1993); and Myer and Webb (1992). However, loan securitisation based on secured
mortgages provides another innovative mechanism to raise capital and increase
liquidity in the financial markets (Brueggeman and Fisher, 2008). CMBS tend to be
bank driven based on secondary cash flows or derivatives (loans) as opposed to
primary cash flows (rents) (Bre idenbach, 2003; Brown and Maty siak, 2000).
Irrespective of the origins of the securitisation, asset based or mortgage based, the
underlying assets are real estate (Hoesli and MacGregor, 2000). One of the
consequences of the financial market turbulences resulting from the residential
sub-prime crisis in 2007 is a freeze of the commercial mortgage backed securities
market. CMBS have turned into one of the scapegoats of the crisis, in spite of their
original creation as a solution to liquidity squeezes and despite the crisis’ origins in the
residential mortgage market. The question therefore arises, what would be necessary
for the CMBS market to unfreeze again? Due to their original design to ease liquidity
Commercial
mortgage backed
securities
399
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