CMBS Subordination, Ratings Inflation, and the Crisis of 2007-2009

51 Pages Posted: 26 Jul 2010 Last revised: 9 Nov 2013

See all articles by Richard Stanton

Richard Stanton

University of California, Berkeley - Haas School of Business

Nancy Wallace

University of California, Berkeley - Real Estate Group

Date Written: July 2010

Abstract

This paper analyzes the performance of the commercial mortgage-backed security (CMBS) market before and during the recent financial crisis. Using a comprehensive sample of CMBS deals from 1996 to 2008, we show that (unlike the residential mortgage market) the loans underlying CMBS did not significantly change their characteristics during this period, commercial lenders did not change the way they priced a given loan, defaults remained in line with their levels during the entire 1970s and 1980s and, overall, the CMBS and CMBX markets performed as normal during the financial crisis (at least by the standards of other recent market downturns). We show that the recent collapse of the CMBS market was caused primarily by the rating agencies allowing subordination levels to fall to levels that provided insufficient protection to supposedly "safe" tranches. This ratings inflation in turn allowed financial firms to engage in ratings arbitrage.

Suggested Citation

Stanton, Richard H. and Wallace, Nancy E., CMBS Subordination, Ratings Inflation, and the Crisis of 2007-2009 (July 2010). NBER Working Paper No. w16206. Available at SSRN: https://ssrn.com/abstract=1648006

Richard H. Stanton (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

Haas School of Business
545 Student Services Building #1900
Berkeley, CA 94720-1900
United States
(510) 642-7382 (Phone)
(510) 643-1412 (Fax)

Nancy E. Wallace

University of California, Berkeley - Real Estate Group ( email )

Berkeley, CA 94720-1900
United States

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