Monday, August 25, 2008

The effects of defeasance on CMBS

Greetings, by the way, from Wisconsin, where I am blogging at poolside. As CMBS get more mature, more and more properties are defeased, a somewhat complicated process whereby the mortgage on a piece of property is replaced in an investment pool by US Treasury bonds. (Yes, I have enjoyed doing a few defeasances over the years.)

With its AAA rating, Treasuries are looked at positively by investors. But this report cites Barclay's analysts who think these pools are "grossly mispriced." I am not as expert as these folks are. I just know I like the safety of Treasuries, especially in this market. The article also talks abotu the much-ballyhooed $225 million apartment complex loan that is apparently in an imminent, no-hope default situation, and people are blaming poor underwriting.

Why is this so important? Part of me says sky is falling mentality, but then I remembered that this is almost certainly one of the "big deals" in an investment pool. It used to be that $40 million loans were "big deals." That bar has risen with time, but I would be surprised if this complex was not one of, if not the, deal on which the whole CMBS pool was anchored. For all intents and purpoises, this could be big bad news for every tranche in that pool. But one bad investment does not a sky fall, so I'm not going to hoard gold or anything.

(Courtesy of Deal Junkie.)

Enough for one day. I'm off to luxuriate for a while.

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