Is COVID Revealing a CMBS Virus?
58 Pages Posted: 23 Aug 2020 Last revised: 1 Dec 2020
Date Written: August 10, 2020
Commercial loan valuations crucially depend on accurate loan income, but underwritten income on CMBS loans is commonly overstated when compared to actual property income. Consistent with these differences being purposeful, income overstatement in 2013 to 2019 CMBS deals varies widely and persistently across originators, is priced by originators, predictable ex-ante, and accompanied by inflation of past financials. Originator income overstatement is highly predictive of pre- and COVID-period loan distress. Appraisal and cap rate aggressiveness also predict current distress. Overall, recent market stresses seem to further verify the 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