Commercial Mortgage-Backed Securities Prices Reflect Irrational Fears, Study Predicts CMBS to Perform Well in Recession

'In Search of Fair Value for CMBS' Forecasts Minimal Downgrades, Defaults and Losses, Presents New Data on Market's Mispricing of CMBS

A study commissioned by the Commercial Mortgage Securities Association (CMSA) presents new data on the mispricing of commercial mortgage-backed securities (CMBS) compared to their fair value and returns relative to risk profile. The study predicts CMBS will perform well in a deteriorating recessionary environment. It concludes that current spreads for most CMBS vintages are still far wider than their fair value, an irrational market reaction that presents significant arbitrage opportunities for investors.

'There are no skeletons in the CMBS closet,' said Jun Han, Ph. D., the author of the study. 'Market fears and the liquidity crunch have dramatically distorted the value of commercial mortgage-backed securities, creating one of the best environments in history for investing in CMBS.'

The study performed multiple stress tests on CMBS bonds based on three historical and worst-case recession scenarios. It analyzed all 19,583 commercial mortgage loans in the 675 CMBS bonds that make up the four CMBX indices, which account for approximately 39% of fixed rate conduit CMBS outstanding.

The study concludes that investors have strong reasons to be optimistic. Among the findings revealed today at CMSA's 14th Annual Convention in New York:

-- Fixed-rate, investment-grade CMBS perform very well in the study's
stress-tested analysis, with minimal defaults, credit losses or yield
degradation. No CMBS rated AA or higher are expected to incur any
loss under the study's recession scenario, while 99% of A-rated CMBS
should be free of losses and the remaining 1% should incur only a
small loss.
-- The risk of CMBS downgrades is very limited. For example, 98% of
AAA-rated CMBS and 94% of A-rated CMBS are at no risk of downgrade in
a recession scenario.
-- Current CMBX index spreads unreasonably imply a 'doomsday scenario,'
with such spreads implying that future defaults and losses would be
many times the levels of historical experience. Incredibly, when
applying the spreads at which the CMBX 4 index has recently traded,
the implied annual collateral default rate was over 100% for AAA-rated
CMBS on March 20, compared to a historical CMBS average of less than
1%.

'Just how off-target is the CMBX market? We can actually put a dollar value on it,' Dr. Han comments. 'When applying a worst case 1986 stress test scenario, spreads on the CMBX 4 index of almost 1,200 basis points over T-bills, were almost twice as high as would have been expected at fair value. This demonstrates the kinds of distortions and limitations of ceding the determination of value of the nearly $1 trillion CMBS market to an untested and volatile derivatives index during an unprecedented credit and liquidity crisis.'

Results of the study were reported at CMSA's annual convention. The convention gathers hundreds of investors and other members representing all parts of the CMBS marketplace. The event, held at the Waldorf=Astoria from June 9-11, features sessions covering topics including securitization, commercial real estate volatility and investor confidence.

About Jun Han, Ph. D.

Dr. Jun Han has more than 20 years of experience in real estate investment strategies and research, portfolio management, trading and risk management. He is founder and editor-in-chief of CMBS World, a professional publication in the commercial mortgage-backed securities industry, and founder and principal of JHP Capital, a commercial real estate investment consulting firm. Previously, Dr. Han was a principal with Barclays Global Investors (BGI)-Advanced Active Fixed Income, responsible for commercial real estate debt investments, portfolio management, and surveillance. Prior to joining BGI, he oversaw research and strategies for John Hancock Real Estate Investment Group. Previously, he was Vice President of Research and Strategy at CIGNA Real Estate Investors. Dr. Han has a Ph.D. in Urban Studies and Real Estate from MIT, a Master of City and Regional Planning from UC Berkeley, and a Bachelor of Engineering from Tongji University in Shanghai.

ABOUT CMSA

Commercial Mortgage Securities Association (CMSA) is an international trade association dedicated to promoting the ongoing strength, liquidity and viability of commercial real estate capital market finance worldwide. With about 400 member companies worldwide, CMSA offers unparalleled leadership in the commercial real estate markets. Our diverse membership base spans the globe and represents the full range of the industry's market participants, from senior executives at the largest money-center banks and investment banks, rating agencies, insurance companies, and investors to service providers. Member-driven, CMSA is dedicated to insightful, forward thinking that encourages vision, innovation and continuous professional growth for market participants. It is committed to being responsive to its members and providing them a culture of collaboration, collegiality, open and inclusive dialogue, consensus building and respect for diverse views.

PRESS CONFERENCE: Monday, June 9, 2008. 1:30pm Waldorf=Astoria, NY

Source: Commercial Mortgage Securities Association

CONTACT: Carol Berman, +1-917-747-8538, cberman@apcoworldwide.com, for
Commercial Mortgage Securities Association