Skip navigation

Category Archives: Mortgage Industry

Below is the link to the 3Q12 Economic Report I wrote for a Colorado Bank’s Board of Directors and  (reproduced with permission):

Below is the link to the 3Q12 Economic Report I wrote for a Colorado Bank’s Board of Directors and  (reproduced with permission):

I’ve temporarily had to put aside QuantumRisk, since the data pricing was raised to $800,000 p.a., and now work for a bank. The link below provides the 2Q12 Economic Report I wrote for the  bank’s Board of Directors (reproduced with permission):

Here is the March 16th 20011 CREPIG podcast interview with JW Najarian & Robert Schecter. It has been described as ‘educational’.

This interview covers many topics, the economy, residential mortgages, commercial properties, distressed property industry, and especially methodology errors.

This interview is also available at the QuantumRisk website,

I hope you find this interview informative and an enabler to executing better investment decisions.

I just completed a podcast with CREPIG. Will let you know when it is available. The podcast is based on my work on portfolio Credit Risk loss behavior. I have distilled the “Solomon’s 5 Rules” for building CMBS portfolios. These rules apply to other MBS portfolios, too.
1. Number of Properties: Portfolios should consist of more than 100 properties, ideally between 150 & 200 properties. Portfolios are less sensitive to any one default. Note, this is not about dollar values. It is about the number of properties and loans in a portfolio.
2. Similar loan sizes: Keep all loans sizes to a similar size as this reduces the risk of a single large loan taking down the entire bond stack. For example, if a deal consist of 149 $1 million loans and 1 $50 million loan, the deal risk is substantially skewed to the risk of that single $50 million deal.
3. No Cross Collateralized: Avoid any cross collateralized loans or multiple property loans. These carry much higher risk than single property loans and have a 150 basis points higher default rate.
4. Slicing & Dicing: Don’t do it. At best it has a small positive effect on the loss characteristics of the deal or portfolio, but generally it is much worse because it triggers multiple defaults and increases the portfolio’s severity of loss. And to make matters worse, servicers have difficulty reporting loan statistics for sliced and diced loans.
For example, slice 250 properties into 100 slices each and recombine each property slice into 100 mortgages. Then 2 or 3 non-paying properties do not appear to have any effect on any of the mortgages. But if the number of non-paying properties rises to 6, 7 … 10 or higher, then all mortgages default. Then we find ourselves in a position where 100% of the mortgages have defaulted, instead of 6/250 to 10/250 or 2.4% to 4% of single property mortgage defaults.
What slicing & dicing does is that it converts 250 diversified properties into 100 identical mortgages, i.e. it negates any and all diversification that the portfolio may have had.
5. Single Property, Multiple Loans: If you have a multiple loans to cover a single multistory
building use a fail-soft approach and be specific about each loan.
5. 1 Clearly Designate Income Allocation:
For example loan 1 is secured against income from floors 1 to 5. Loan 2 is secured against income from floors 6 to 10, etc. These loans now behave like loans in neighboring buildings. This reduces the correlation risk between the loans, and a single loan default does not cause the other loans to default.
This is much better for the borrower, because the borrower does not lose his property as a result of a partial loss of income. And more importantly for the investment banker, when the mortgages are securitized into a CMBS deal, the smaller loan defaults slow the loss escalation through the bond stack.
5.2 No Cross Tenants: As far as possible make sure no single tenant appears in more than one loan. Cross tenants increase multiple loan defaults.

On a monthly basis QuantumRisk analyses more than 102,000 commercial properties with a total original appraised value of $1.5 trillion, backing more than 64,000 loans, with an outstanding debt of $680 billion, to report default rates, loss severity before recovery, loan to value ratio (LTV), debt service coverage ratio (DSCR), occupancy rates, cap rates & change in property appraisal value for more than 400 U.S. markets, by property type, by city, by MSA by state.

There are 5 types of CMBS Property Risk Analytics* reports:

1. CMBS Deals
2. CMBS Warehouse/Portfolios
3. CMPB Property Risk by City by State
4. CMBS Property Risk for a specific City
5. CMBS Property Risk for a specific MSA

There are 24 sample example reports of rigorous evaluations of the downside risk a CMBS Deal, Warehouse or Portfolio may be subject to given the current, this past month’s, economic conditions. These reports may be used to assess the potential upside risk. To keep your costs to a minimum QuantumRisk provides one-off reports for a specific set of deal / warehouse / portfolio requirements.

The reports are ideal for deal/bond restructuring, associating default risk to the bond stack, negotiating portfolio pricing based on today’s loss characteristics, and sub-optimal investment avoidance i.e. the portfolio may look great on paper but without an evaluation of the loss characteristics one may not be fully informed of the downside risks.

To purchase any of these reports, please conatct Ben Solomon.

*Property Risk Analytics is the registered trademark of QuantumRisk LLC.



Guan Jianzhong, Chairman of Dagong Global Credit Rating Co. Ltd

Bloomberg reports that China’s Dagong Global Credit Rating Co. reduced its credit rating for the U.S. to A+ from AA citing a deteriorating intent and ability to repay debt obligations.

Having worked on both sides of the world, I have come to associate such statements with shortsightedness. My past experience as a senior research analyst for a brokerage firm in Asia-Pacific would suggest that we are going to see problems in China by 2012.

In this blog post we take a look at how consumers could cope with the Mortgage Mess. Yes, we need strong banks otherwise the Dagong rating will be fulfilled, but this economy is 70% consumer driven. We therefore need stronger consumers, as strong consumers underpin the health of the banks, and not the other way around. Using China as an example, as China’s income per capita rises its banks and financial services companies become more confident of themselves, therefore the Dagong ratings comment above. 

I want to inform our readers that QuantumRisk’s CMBS Property Risk Analytics promotion ended September 10, 2010 per an earlier newsletter. The new pricing, valid until March 2011, is available here.

Home Prices Sag in August 2010

The State of the Housing Market
In my August 2009 blog post Have we hit the Housing Bottom? I had suggested that the house prices will bottom in 1Q 2010. Given the graph, I must say that this was a pretty good estimate of timing. 

The second question I had attempted to answer then, was home price recovery sustainable? My answer at that time was that it was more likely not.

The economic analysis presented by HiddenLevers (see picture) suggests that house prices are struggling to maintain an upward momentum. 

Why? There are two reasons. First the glut in foreclosed homes (1 in 4 for sale are foreclosed) will keep supply substantially greater than demand. Second, 1 in 6 homes in foreclosure translates into 1 in 6 homeowners who will not be able to participate in homeownership for at least 7 years or a 15% reduction in demand.

The graph shows that house prices are now hovering in the 68% to 71% range of their 2006 peak values.  From an economic cycle perspective, the housing industry collapsed before the commercial property industry. Given a 15% reduction in residential ownership capacity, it is very likely that commercial property sector will recover before the residential sector does. That is, the trough in the residential sector will be longer than that of commercials.

What is not reported in the news is the residential vacancy rates. A friend of mine who works for a utility company told me a few weeks ago, this utility is seeing 1 in 7 homes vacant. This is 50% more than reported by US Census Bureau for 2Q. That means rental incomes will not increase in the medium term. It also means that utility revenues will fall by 14%.

Some other bank just increased the difficulty of Chief Executive Officer Brian T. Moynihan 'hand to hand combat' over mortgage disputes.

The Next Big Wave: Legal Risk
Most of us are focused on market, credit & operational risks, but the next big wave will be legal risk.

I recently found out that banks are selling the second mortgage on foreclosed homes to debt collectors. Sure this maybe legally possible but lets weigh the pros & cons. The pros. Maybe banks think they can get back they principal in the second mortgage by selling the second mortgage to a debt collector. Sounds great, high fives to the managers who thought up this one. And at worst you don’t even have to write it off your balance sheet just yet. Kudos.

But wait. Does anyone really think they can get their money back from homeowners who could not even pay their first mortgage? Especially if they are unemployed? It also raises another question, what was the function and scope of collateralization?

Now the cons. What this action has done is to clarify that in the event of a foreclosure / repossession, the bank recognizes that collateralized debt survives ownership and can be put back to owner / originators. (Check with legal counsel for an informed opinion.) In the United States one cannot have one set of laws for one group of people and another set for another group of people.

Therefore, investors who bought RMBS bonds can now recognize that their securitized bonds survive any asset ownership issues, and banks are now liable for securitized bonds because they survive ownership.

I found out about a bank’s access to your personal funds some years ago. When I contacted the FDIC about it they said they could not do anything about it. Some mortgage contracts include a single sheet document that states that the bank has the right to move your funds around to keep your mortgage current. This I believe is antithetical to the securities law because securities law does not allow financial services companies to move funds around for a client for the benefit of the company.

The problem here is given such a ‘contract’ will or does the bank have the right to reach out to your 401(k) or similar funds?

Prime fixed rate foreclosures jump

How Consumers Can Protect Themselves
There are several ways consumers can protect themselves from future messy mortgage problems:

 1. House Pricing: The graph above (picture in State of the Housing Market, above) suggests that with today’s market conditions a home buyer should consider as an upper limit a purchase price of about 70% of the 2006 appraisal. If the housing situation deteriorates, this 70% number will drop. Looking at CMBS for guidance, this number can get to be as low as 54%.

 2. Appraiser Selection: Before purchasing, get an appraisal of the property by an appraiser who does not have links to banks as this minimizes banker bias.

 3. Mortgage Origination: If you are purchasing a foreclosed property, it is not recommended that you get your mortgage from the same bank that foreclosed the property. Why? At least in theory, in the event that there are ownership issues, you have a different bank behind you. 

 4. Safeguards: Given the state of the housing market, it would be prudent for the home buyer not rush into a purchase as the housing market is not likely to recover anytime soon. If you do so, you would need to have staying power. Therefore, before making a purchase, here are some points you should consider:

 4.1 Title Insurance: Don’t sign an S&P if you cannot get title insurance.

4.2 Deposit: Make your deposit conditional upon getting a clean title.

4.3 Indemnification: Require that the seller and/or the mortgage provider accepts liability for any future ownership claims in the event of the failure of the title insurance company. The lesson of 2008 was that many securitized bond credit enhancements (credit insurance) turned out to be worthless when the economy as a whole turned south.

4.4 Survival: Require that in the event of a foreclosure/repossession that all collateralized claims (1st, 2nd & 3rd liens) cannot survive the ownership.

4.5 Delinquency: Require that the mortgage provider cannot start foreclosure proceedings until the mortgage is at least 90 days past due. In the state of Colorado there are no laws to prevent a lender from foreclosing on day 2. Yes, even I was surprised by this, and know of at least one recent case where the foreclosure proceeding was started on day 50. 

4.6 Miscellaneous Contracts: Do not allow the mortgage lender have access to your other funds. Remove all such ‘subcontracts’ from your S&P agreement.

 5. Walk Away: If there are any doubts about the price, property or claims on the property, walk away. This market in not going to recover any time soon, and there will be plenty of second chances.

 There are many really good managers in banks, but as a general rule banks rotate their managers. So the great manager you see today could be replaced by a rogue manager tomorrow. Therefore do not feel ‘uncomfortable’ including these conditions in your S&P. You may even have to hire your own legal counsel to protect yourself. Remember it is wiser to walk away then to be burdened by a debt for a property you no longer own.

The real sad story is that we will eventually see 1 in 6 families homeless. To put things into perspective, James Fry, founder of Mean Street Ministry, reports that when he started this ministry about 10 years ago, there were 2 suicides per year, today there are 2 a week. We as a family have known James Fry, his family & his ministry for many years. Let us in Thanksgiving help someone in return.


Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational / educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position. Nor is this blog post to be construed as investment advice. 

Contact: Ben Solomon, Managing Principal, QuantumRisk

Real Problem versus Many Perspectives 
The perspectives reported on the Mortgage Mess varies very widely. From the political right is the Wall Street editorial “We’re not aware of a single case so far of a substantive error” to the political left Congressman Alan Grayson’s “the easiest way to make a buck is to steal it”. This one really shocked me, financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in “foreclosure expert” jobs with no formal training.

In my opinion these are details that subtract from the big picture. Without understanding the big picture we would not have a context in which to address this Mortgage Mess.

What is the big picture? It is, is our fiduciary responsibility to our shareholders or is our fiduciary responsibility to our customers? Correct picture but wrong perspective.

Our fiduciary responsibility is to our shareholders and that this fiduciary responsibility is derived from our fiduciary responsibility to our customers. We’ll discuss each perspective below.

Residential Mortgage Industry is Shrinking
First some context to this discussion. From the Wall Street reported data I estimate that 15.4% or about 1 in every 6 US homes are in foreclosure, and this does not include recent past foreclosures. That is a huge amount and bank troubles pale in comparison to this number. What does this number tell us?

It says that the mortgage market size will shrink by 15% as foreclosures are executed because foreclosed home owners will be barred for at least 7 years from participating in this market. The lowest estimate I was able to find was 10%. Therefore to remain profitable banks will have to lay off at least 15% of their residential mortgage staff.

Further, as reported in the New York Times, if title companies shy away from insuring foreclosed properties because they think those properties are vulnerable to claims, this will further depress the market, as investors too will shy away. 

Looking at the CMBS industry for clues, even though the reported commercial property appraisals are hovering in the 55% range, the anecdotal prices I have heard suggest purchase prices averaging between 10 to 20 cents on the dollar, and there are no reported foreclosure problems. Therefore, we can infer that the residential mortgage industry will experience similar appraisal versus selling price discrepancies and is therefore not out of the woods, yet.

Good News for Banks?
The Florida attorney general’s office says it doesn’t have the power to investigate banks but it has started an investigation into the law practices. To complicate matters, one needs to be aware that there is a difference between industry practice and actual mortgage regulation. There are also enormous variations from state to state with respect to foreclosure procedures. I found that in one state banks can start foreclosures on day 2 (1 day delinquent). This means that even though the 50 State Attorney General’s offices have launched investigations into the mortgage industry, in my opinion the banks don’t have to worry about them as these offices have no teeth. But some how this does not sound like good news, right?

First Fiduciary Responsibility
This Bloomberg article very nicely summarizes the current Mortgage Mess. That there are two fronts, “against U.S. homeowners challenging the right to foreclose and mortgage-bond investors demanding refunds that could approach $200 billion”. Of course this is an evolving situation and it is very likely many more fronts will open up.

The first fiduciary responsibility is to your customer. This is very clear in the many securities regulations since 1933. Of course banks are governed by banking regulations and in many instances are exempt from securities regulations as these exemptions are covered in the banking regulations.  Therefore I wonder if the banking regulations are any where nearly as concerned about protecting bank customers as the securities regulations require of investment advisors and broker-dealers?

Though the individual contracts appear to be in favor of the banks, investors are using every means possible to force banks to buy back bad mortgages. The final outcome, however, may play out in terms of power of buyers versus power of sellers, and not through legal means. That is investors in the future will seek assets from players who are amenable to buy backs than from those who are not.

This may be a good thing for the economy as insufficient principal protection may cause investors to seek alternative investments such as manufacturing, R&D driven technology licensing, and new materials, to name a few. Why? Because residential mortgages are no more safer than R&D.

Therefore, why did the residential mortgage market develop to the size it did? I can only conjecture that the existence of GSEs led to the mistaken belief that residential mortgages were one of the safest forms of investments.

Second Fiduciary Responsibility

The second fiduciary responsibility is to shareholders as this is a derivative of the fiduciary responsibility to customers. It is in this context that one would ask the question, how did this Mortgage Mess come to be?

In this context, given the Wall St. crash of 2008 and in the light of the Goldman Sachs hearings, the Wall Street editorial opinion that “We’re not aware of a single case so far of a substantive error” is difficult to justify as this would raise other questions.

As a general rule organizational seniority and salaries increase with fiduciary responsibility to shareholders. Therefore the questions, why did we did not have in place the systems and procedures to detect “substantive error”? Why were we paying managers so much if they did not know what was happening? What were these managers thinking?

Quite obviously operational risk and credit risk methodologies were insufficient. And may be they were ignored? A rethink of these methodologies and how risk committees are staffed and to whom they report to is in order.

Some Likely Future Outcomes

In the context of the First Fiduciary Requirement we can infer some future outcomes. 

Firstly, if there genuinely were mistakes in the foreclosure process, the second lien holder should now have a claim to the funds recovered from the sale of the property as the first lien holder did not conduct his fiduciary responsibility correctly. (Check this with your attorney as he may disagree.)

Second, title insurance fees may increase. Title insurers have two options either do not insure the title or substantially increase the fact checking required. The latter will increase title insurance fees. Assuming that Congressman Alan Grayson’s findings are correct, I believe that title insurance firms will choose not to insure as it would be more expedient to not insure than to dig up bad documents. Therefore, don’t expect title insurance for foreclosed homes unless the bank owns the title insurance firm, but this should raise questions of bias. My guess is that the title insurance problem is only going to get more complicated.

Third, future bank purchases will be structured more like an asset sale than an acquisition or merger. Why? First you don’t absorb the bad management team. Second by insisting only on asset purchases you put into place a screening process that substantially ensures that you are not purchasing a barrel of bad apples. Sure its a lot of work but that comes back to the banks’ fiduciary responsibility to its shareholders. An asset sale would allow the purchaser to include a clause that any future claims due to fraud, misstatement or omissions are the liability of the seller’s management team. Therefore one can infer that Bank of America’s purchase of Countrywide as a single company was not a good strategy, and that any subsequent M&A activity in the banking sector would require a rethink.

Fourth, further changes to securities regulation. Dodd-Frank indeed may turnout to be insufficient or in the worst case irrelevant as private action against mortgage industry participants further tighten regulation. For example if we assume that the alleged wrong doings were conducted by a handful of employees and not an issue of management culture, checks and controls, then we can expect changes to portions of the securities and banking regulations that would provide investors more time to seek recourse. For example Securities Act of 1934, Section 10(b), investors have two years from discovery of the fraud or five years from when it occurred to file their claim, while Sections 11 and 12(a)(2) claims against misstatements or omissions must be brought within one year of discovery and three years of the securities filing. These timing could be changed to 10 years or simply no statue of limitations for any fraud, misstatements or omissions.

Fifth, we would expect bond investors require,
1) A buy back clause in any future securitization, and that buy back clause is automatically transferrable to any and all future bond holders. At the very least in the event of the failure of the insurance provider.

2) That any third party providing a fee based opinion about a or soon to be securitized deal state that they have fully examined the collateral backing the deal.

This downside risk assessment of the residential mortgage industry suggest that an end to the industry turmoil is not in sight. Further, we can expect substantial private sector initiated changes to investment contracts that will provide both investors and home owners with better uniform protection.


Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational / educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position. Nor is this blog post to be construed as investment advice. 

Contact: Ben Solomon, Managing Principal, QuantumRisk

It is critical for investors & real estate professionals to know which cities to invest in and which to stay away from for the time being.

We are very pleased to announce that CoStar’s Watch List featured some of our May 2010 Analytics in their article, “Impact of CRE Distress Varies Widely Market to Market” receiving more than 10,000 reads within 24 hours. A sample report for All Properties is available at  

Our July 2010 CMBS Property Risk Analytics** (CPRA) shows that CMBS defaults & losses vary across the US by city from 0.0% to 80.0% defaults & 0.0% to 78.0% loss severities. Defaults rates continue to increase but loss severities continue to decline. How?

July 2010 CMBS Default Rates

The July CMBS Property Risk Analytics shows that the CMBS default rates continue to increase, and is at 5.79%. Note the graph is a snap shot of the CMBS pipeline as of the end of July 2010.

July 2010 CMBS Severity of Loss 

The July CMBS Property Risk Analytics shows that the CMBS severity of loss (before recovery) continues to decline and is now at 5.51%. Note, the severity of loss numbers do not include loss due to appraised value reductions. Note the graph is a snap shot of the CMBS pipeline as of the end of July 2010.

FDIC’s Mixed Report on Banks
FDIC’s list of “problem banks” reached 829 in 2Q 2010, NY Times August 31 2010. Even so, bank earnings continue to rebound posting $21.6 billion industry profits. “Across nearly every category, troubled loans started falling for the first time in more than four years. The sole exception was commercial real estate loans, which continued to show increased weakness. Still, the nation’s 7,830 banks remain under pressure.”

 New York Times / Jonathan Ernst / Reuters

“Without question, the industry still faces challenges,” Sheila Bair said in a news statement. “But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction.” The agency expects a “recovery, sluggish and slow”.

The FDIC is cautioning that even though the outlook is becoming positive it may not be positive enough for a strong recoveery. On the other hand Russell Abrams of Titan Capital Group LLC, is betting the market is underestimating the likelihood of a crash (Bloomberg August 30, 2010)

So whose outcome is more likely, the FDIC’s small positive or Abrams’ second market crash leading to a double dip recession?

Will This Recession Be A Double Dip?
Our CMBS Property Risk Analytics shows that defaults are increasing but loss severities are declining. Apparently contradictory behaviors when you take into account that defaults and loss severities are usually positively correlated.

What is happening in the economy is that up to about a year ago CMBS defaults were dominated by newer loans that were backed by over priced (compared to today’s) valuations. Therefore, the large severity of losses late in the pipeline. The more recent defaults are from much older loans. Therefore smaller severity of losses early in the pipeline.

This tells us two things. First, industry losses that were primarily driven by over priced valuations have been fully absorbed by the industry – good news. Second, the industry losses has transitioned to a second stage, insufficient revenue. That is the more established older loans are defaulting due to insufficient business revenue.

It is this second stage that worries me. Our CMBS Property Risk Analytics shows that at the national level City DSCRs – a proxy for business revenue – are at 1.366 (April), 1.367 (May), 1.376 (June) and 1.397 (July). About constant between April, May, June and a 2.3% increase in July.

Could the July 2.3% increase be a one off ‘bump’ in the reported data?

Looking at the national level City Occupancies, our CMBS Property Risk Analytics show that City Occupancies were at 88.22%, 88.51%, 90.16% & 89.33% respectively. That is in the last 4 months there has been a general upward trend in CMBS City Occupancies of 0.5% increase per month – also good news – and if sustainable will reflect a general economic environment that will avert a second market crash & double dip.

Therefore, in my opinion a double dip recession is unlikely and I disagree with Russell Abrams opinion that a second market crash is likely to occur. I concur with Sheila Bair that even though a recovery is in place, at this point in time, a recovery is not likely to be as fast as we would like it to be.

Disclaimer: There is a certain amount of opacity in any business. For example the collapse of Lehman Brothers took us all by surprise. Therefore, if for example a major bank were to collapse that would alter this expected outcome.

CMBS Property Risk Analytics Pricing & Promotion
For Single Users, the CMBS Property Risk Analytics monthly reports are priced as follows:

 Item Title Monthly Price
QR CPRA Retail $135.00
QR CPRA Office $135.00
QR CPRA MultiFamily $135.00
QR CPRA Hotels/Lodgings $135.00
QR CPRA All Properties $370.00


The prices shown do not include discounted annual price, sale tax for Colorado residents/companies or Multi User pricing. For more information on pricing visit our website

The corresponding April, May, June & July reports will be provided free for all 12-month or annual subscriptions paid by September 10, 2010. For PayPal payment instructions, please contact Ben Solomon. Note, an email address is required for receipt of ftp user id, ftp password and decryption password for each monthly report.

A sample report is available at

How the CPRA Report is Generated?
Every month we analyze reported data on more than 85,000 properties backing more than 52,000 loans to identify default probability, loss severity before recovery, loan to value ratio (LTV), debt service coverage ratio (DSCR), occupancy rates & change in property appraisal value for more than 400 U.S. markets, by property type, by city, by SMSA/MSA by state across the US. Five property type reports are generated: All Properties, Lodgings/Hotels, MultiFamily, Office & Retail.

** Property Risk Analytics is the registered trademakr of QuantumRIsk LLC.


Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position. Nor is this blog post to be construed as investment advice. 

Contact: Ben Solomon, Managing Principal, QuantumRisk

Our latest CMBS product, QuantumRisk CMBS Property Risk Analytics (*1) (12 Mb Excel 2007 worksheet) will soon be available as an annual or monthly subscription or one-off purchase on the 15th of each month. 

QuantumRisk LLC invested more than $250,000 in research to develop the algorithms required to produce this product, CMBS Property Risk Analytics, on a monthly basis. For those of you who are familiar with the raw CMBS data know that this is no small feat.  

Robust,  valid and reliable market data is indispensable for actionable CMBS investment decisions and we are extremely proud to be the only one if not one of the very few companies providing this level of detail for CMBS defaults and losses. Thus providing more insightful commercial real estate business intelligence to our clients. 

On a monthly basis we analyze more than 85,000 properties backing more than 52,000 loans to report default probability, loss severity before recovery, loan to value ratio (LTV), debt service coverage ratio (DSCR), occupancy rates & change in property appraisal value for more than 400 U.S. markets, by property type, by city, by SMSA/MSA by state. Every month! 

The purpose is for sophisticated investors, investment bankers, underwriters and fund managers to know what is happening where it is happening when its happening. Even the muni bond professionals and local & state governments can use this report to figure out what is happening in their local market, as the commercial real estate market is reflective of the local business environment and therefore reflective of the local economy. 

We are also very pleased to announce that CoStar’s Watch List featured some of our May 2010 analytics in their newsletter article, Impact of CRE Distress Varies Widely Market to Market. This article received more than 10,000 reads within the first 24 hours. 


How Will Investors Benefit?
Because we analyze more than 85,000 CMBS properties & 52,000 loans on a monthly basis we have had to develop proprietary data algorithms to process this very large amount of data generated by the manual data entry origination-securitization-servicing business process. These CMBS Property Risk Analytics are organized into more than 420 tables for easy instant access of the data directly from your own Excel 2007 models. 

We report CMBS Property Risk Analytics by property type for cities, SMSA/MSA & states where there are 5 or more good property information in that property-geographic-statistic bucket, thereby further reducing the noise in the data. We don’t guarantee the end result is error free because we have no control over the origination-securitization-servicing business process but we do assure you that we have done our very best to give you the very best. 

Because the latest data is available on a monthly basis you get the most up to date information about what is happening across the United States in the commercial real estate world. 

Included in each monthly Excel 2007 report are 8 tutorials on how to use these analytics so that you the subscriber is benefiting from these reports within minutes of receiving them. 


What Questions Can Investors Answer?
1.Too much or too little capital?
Are you putting down too much capital with an LTV of 0.6, and want to know what Current (*2) LTVs are in Columbus, OH? 

Answer: You are most likely putting down too much capital as Current LTVs in Columbus OH are averaging 0.71. You could probably reduce your capital requirements by 11% by seeking other lenders. 

2. Realistic income generation?
Will the local or regional economy facilitate an income stream reflective of a DSCR of 1.2 in White Plains NY? 

Answer: Not likely as Current (*2) DSCRs in White Plains NY are averaging 1.03. A DSCR of 1.2 may be acceptable in a few years when the economy improves, but not today. If you were a muni bond professional or in local or state government the DSCRs would provide a quick & dirty indicator of whether you would need to raise taxes or not for general obligation bonds. 

3. Expected loan loss before recovery?
What is my expected loan loss in North Las Vegas, NV?   

Answer: The expected loan loss (before recovery) of North Las Vegas, NV, is 7.45% with a probability of default of 27.59% and severity of loss at 27.01%. As of May 2010 North Las Vegas is a high risk lending environment. Even though Las Vegas is high risk (2.40%, 15.79% & 15.23% respectively) it is less risky than North Las Vegas.  

4. City not found?
OK there is no data about Lewiston, ME, can I substitute with the SMSA Lewiston-Auburn, ME or the state level data? 

Answer: Yes. If a property count for a statistic is less than 5 (*3) we do not report this city, SMSA or state level statistic. 

5. Realistic occupancy?
In the past, CMBS cash flow models have generally assumed occupancies of about 99%. Is this a valid assumption especially since this Great Recession? So what would be a reasonable occupancy rate for Fort Worth TX? 

Answer: As of May 2010 the occupancy rate for Fort Worth TX is 85.97%. This rate will definitely increase as the local Fort Worth / Texas economy improves but at this time any occupancy rate much greater that 85.9% would be considered optimistic. The occupancy numbers presented in our CMBS Property Risk Analytics does not include completely vacant properties. 

6. An estimate of recent appraisal discounts?
What is the average reported property appraisal change (*4) in the state of Texas, over the last 15 months? 

Answer: As of May 2010, in the state of Texas the reported property appraisals are at 61.37% of appraisals done at origination. 

7. Comparative local economics?
Which city poses less commercial property risk? Pasadena CA or Beverly Hills CA? 


State:City # Of Reported Properties in City Probability of Default Severity of Loss Expected Loss
CA:Beverly Hills 45 2.22% 2.22% 0.05%
CA:Pasadena 47 0.00% 0.00% 0.00%

With our CMBS Property Risk Analytics we can answer this question conclusively. It is Pasadena CA. 


(*1) “Property Risk Analytics” is the trademark of QuantumRisk LLC. 

(*2)  Current LTV and Current DSCR are calculated using the most recent appraisal values, outstanding balances, NCF DSCRs & NOI DSCRs. 

(*3) The number of properties used to determine a statistic (after processing) varies from 5 to several thousands depending on the size of the city/SMSA/state, property type and the type of statistic being reported.
(*4) Appraisal changes are not as well reported as LTVs or DSCRs. For example, there may 400 SMSA reported for defaults but only 35 for appraisal changes.


The Big Surprise: Multi-Property/Cross-Collateralized Loans  

Since we had all this processed data I thought I would check to see if single property loans were at a higher risk than multi-property loans, because from a loss perspective why would we put multiple properties into a single loan or even cross-collateralize a loan?  

I set up 2 pools of loans. The first pool consisted of 42,488 single property loans of all property types and the second of 2,177 multi-property & cross collateralized loans. The surprisingly results below show that multi-property & cross collateralized loans are at a higher risk of default than single property loans. So much for the assumed portfolio diversification effects. With respect to losses, for a better understanding of how portfolio diversification does or does not work see my blog post Loss Containment: Portfolios


Mortgage Pool  Mortgage Count  Total Mortgage Original Principal Balance ($1E6)  Mortgage Default Rate  Average Mortgage Severity of Loss without Recovery 
Multi-Property  2,177  18,356  7.49%  7.19% 
Single-Property  42,488  454,809  5.94%  5.65% 


Why Do We Recommend a Monthly Subscription?  

With a monthly subscription you can look at trends in the data and your decision making process is enhanced by the knowledge of the local trends. The table below the DSCRs of 3 SMSA/MSA present in the data, Denver-Boulder, CO, Atlanta,GA, and Dallas-Fort Worth, TX.   

      Denver-Boulder, CO     Atlanta,GA     Dallas-Fort Worth, TX 
   Reported Properties  Reported Current DSCRs  Reported Properties  Reported Current DSCRs  Reported Properties  Reported Current DSCRs 
2010/05  112  1.32  237  1.20  212  1.28 
2010/04  239  1.36  534  1.21  520  1.24 
% Change     -2.64%     -0.94%     3.53% 


In this example DSCRs, the ability to generate income to cover debt payments, is used as a proxy for business revenue and therefore local economic activity. Comparatively speaking Atlanta, GA has the worst reported DSCRs of the 3 SMSA/MSAs. We can see the different lags in the local economy even though the national economy is experienceing positive GDP growth. The Atlanta, GA, local economy is still contracting (-0.94%) but not as severely as the Denver-Boulder CO local economy (-2.64%). While the Dallas-Forth Worth, TX, local economy is expanding at 3.53%.  

These contractions and expansions will change from month to month, and a general trend will show where to or not to invest in the near term.



These questions & answers presented above show that with QuantumRisk CMBS Property Risk Analytics there are many news ways to infer what is happenning in the local and state economies that can mitigate risk and reduce expenses. 

Further, we have shown how muni bond professionals, local & state governments can use this data to determine a quick & dirty assessment (and not a substitute for a thorough evaluation) of whether general obligation bonds can be issued without raising taxes and which part of a state needs further attention in terms of recession assistance or business policy matters. 

For a limited time we are making these QuantumRisk CMBS Property Risk Analytics available at a discounted price. Please contact me, Ben Solomon, for further information or to place orders.


Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position. Nor is this blog post to be construed as investment advice. 

Contact: Ben Solomon, Managing Principal, QuantumRisk