CMBS Subordination, Ratings Inflation, and the Crisis of 2007-2009 / Richard Stanton, Nancy Wallace.

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Stanton, Richard

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w16206.Publication details: Cambridge, Mass. National Bureau of Economic Research 2010.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w16206 (Browse shelf(Opens below))	Not For Loan

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July 2010.

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.