Working Paper: NBER ID: w16206
Authors: Richard Stanton; Nancy Wallace
Abstract: This paper analyzes the performance of the commercial mortgage-backed security (CMBS) market before and during the recent financial crisis. Using a comprehensive sample of CMBS deals from 1996 to 2008, we show that (unlike the residential mortgage market) the loans underlying CMBS did not significantly change their characteristics during this period, commercial lenders did not change the way they priced a given loan, defaults remained in line with their levels during the entire 1970s and 1980s and, overall, the CMBS and CMBX markets performed as normal during the financial crisis (at least by the standards of other recent market downturns). We show that the recent collapse of the CMBS market was caused primarily by the rating agencies allowing subordination levels to fall to levels that provided insufficient protection to supposedly "safe" tranches. This ratings inflation in turn allowed financial firms to engage in ratings arbitrage.
Keywords: CMBS; subordination; ratings inflation; financial crisis
JEL Codes: G01; G12; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rating agency behavior (subordination levels) (G24) | market performance (defaults and pricing) (G19) |
| subordination levels (L00) | ratings inflation (E31) |
| ratings inflation (E31) | ratings arbitrage (G12) |
| rating agencies' behavior (G24) | inflated ratings (E31) |
| subordination levels from 2000 (L00) | no losses to senior bonds (G33) |