In some very important news on this day when everyone is arguing whether or not bankers should be getting bonuses and why Sandy Koufax invested in Madoff, this press release by Moody's may be actually huge. The rating agency is reviewing the ratings of $302.6 billion in CMBS conduit and fusion transactions initially rated (stupidly high) in the 2006-2008 period, which represents 52% of the outstanding rated US CMBS market. The two main criteria Moody's is focusing on are stressed cap rates and property cash flows. As both metrics have been getting pounded lately, it is unavoidable that the whole sector will get downgraded by one or many notches very soon. Moody's hopes to get the review done by the end of Q1.
Now Moody's waking up to the fact that CMBS is in trouble is not news, the fact that they will finally do something about it and likely downgrade as much as $300 billion of commercial mortgage-backed securities is actually huge, as large numbers of mutual funds, CDOs, CMOs, CLOs and other alphabet soups who have CMBS paper in inventory, have rating criteria that prohibit holding CMBS below certain ratings. A downgrade (or expectation thereof) could provoke a massive selling of all CMBS securities that would shake the entire mortgage backed market.
The full Moody's report is here, if anyone actually cares about their logic, although we admit it is interesting reading.
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