Is COVID Revealing a Virus in CMBS 2.0?
115 Pages Posted: 23 Aug 2020 Last revised: 13 Oct 2021
Date Written: September 20, 2021
Commercial loan valuations crucially depend on accurate loan income, but underwritten income on CMBS loans is commonly overstated relative to actual property income. Consistent with these differences being originator specific, income overstatement in CMBS 2.0 deals varies widely and persistently across originators, is priced by originators, related across property types within an originator, predictable ex-ante, and accompanied by inflation of past financials. Risk-retention and associated regulation had no discernable effect on income overstatement. Originator income overstatement is highly predictive of pre- and COVID-period loan distress. Overall, recent market
stresses reveal large systemic differences in underwriting standards across originators.
Keywords: Commercial Mortgages, Commercial Mortgage Backed Securities, Income Overstatement
JEL Classification: G21, G23, R30
Suggested Citation: Suggested Citation