Summer 2008 Vol 33, No. 2

Abstract: The economic analysis presented in this perspective suggests that the capital markets have overreacted to the likely uptick in commercial mortgage defaults and losses over the next few years. This article poses that the CMBX/CMBS spreads in the beginning of 2008 have substantially overestimated the default and loss rates, exceeding the realistic forecasts by as much as three times. CMBX tranches rated “A” and above are particularly undervalued from a credit performance perspective. In other words, looking at real estate market fundamentals, the authors view the widening of CMBX/CMBS spreads as unjustified.