In hopes that the CMBS market will not repeat the sins of 2005 – 2007, some revisions to the standard CMBS model are being developed. They are affectionately being called “CMBS 2.0”.
So What Went Wrong Anyway?
As a way of contrast, in 1997, there was approximately $15 billion in CMBS loans originated. Most of the loans were amortizing, had plenty of reserves and the AAA bonds represented approximately 70% of the first mortgage.
Yet, in 2007, there was over $200 billion originated. Most of the loans were interest only rather than amortizing, there was very little in the way of reserves and the AAA bonds represented approximately 90% of the first mortgage.
This doesn’t explain what went wrong but it sure sheds some light on the matter!
CMBS 2.0 Changes
The most significant change that is being made by the “CMBS 2.0 model” is that the originators of the loans must now keep some ‘skin in the game’ and retain some of the ongoing risk of the transaction. It is not clear exactly how much the originators must retain or the exact method of retention. There are many trade associations and real estate groups that are trying to figure all this out right now.
Will CMBS 2.0 Succeed?
It is way too soon to know if the changes being proposed by the “CMBS 2.0 model” will really prevent “2007” from repeating itself; but, as long as commercial real estate owners need financing and there is a lender willing to give it and investors to buy the bonds, it is hard to understand how we don’t go right back to our 2007 model.
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