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CRE Finance World, Summer 2013

15 This chart illustrates the percentage of each vintage that will not achieve full refinancing proceeds under the six modeled scenarios. 16 While the “peak” is generally acknowledged to be mid-2007, we can include 2008 in this shortened description – many loans in this vintage were underwritten in 2007 – and the official Great Recession start date is 2008. We define “pre-peak” vintages as 2004–2008 for simplified vintage grouping, and 2010–2012 as “post-peak”. 17 It should be noted that the 2007 vintage is also expected to experience the highest level of term default. On a relative basis this magnifies the significance of the balloon risk for this vintage. As expected, the 2006 vintage also places second in balloon risk amongst all vintages. 18 The timing of the risk-free interest rate peak — in 3Q2016 — clearly influences the severity of balloon risk across vintages; 2003 and 2004 vintages will mature under more favorable refinancing rate environments as modeled. 19 Please see Exhibit 2. 20 This graph simply measures the percentage, by vintage, of loans that would fall between 5% and 15% short of the necessary refinance proceeds under the prescribed refinance — lenient or conservative — parameters. The actual percentages are not apples-to-apples in all respects under these different scenarios. For example, under the 2010–2012 vintages, the low rate, lenient refinance parameters scenario has the least amount extended; this is due to the projection that substantially more loans are refinanced completely and need no extension. 21 In accordance with our shortened description of the 2004–2008 vintages as pre-peak, we refer to the 2010–2012 vintages as post-peak. 22 Across the conservative refinance scenarios, only 3.3% of the loans qualify for extension with an average reduction in PD of 9% — resulting CRE Finance World Summer 2013 24 in a minimal absolute PD lift of 0.3%. On a portfolio basis the portion of loans that may be extended is 12% or less in all scenarios, so the relative change in PD is less than 3% and the relative change in EL is less than 2% on a portfolio level basis under any scenario. It should be noted that, on a marginal basis (the minimal population of extended loans only), the extension parameters can produce a meaningful difference. The relative reduction in PD is 25% or more under lenient parameters versus 12% or less under conservative parameters. 23 The calculation of probability of default is not binary under the Compass model. Therefore, even if the mean forecasted value indicates default, the loan is not assigned 100% probability of default. Similarly, even if the mean forecasted value does not indicate default, the loan is not assigned 0% probability of default. 24 Our extension parameters permit extension for shortfalls in “market” proceeds of 15% in the lenient scenario, and 5% in the conservative scenario. 25 As the attribution analysis is based on conditional change, the relative impact of conservative refinancing, rising interest rates and higher pass through to cap rates can vary if the order of changed attributes varies. However, in the case of RefiPD, conservative refinance assumptions have the most impact regardless of order (Higher pass through rates is attributed last as it is predicated on rising interest rates). 26 As the attribution analysis is based on conditional change, the relative impact of conservative refinancing, rising interest rates and higher pass through to cap rates can vary if the order of changed attributes varies. However, in the case of RefiEL, the higher pass through rate has the largest impact whether conservative refinance assumptions or rising interest rates are measured first (Higher pass through rates is attributed last as it is predicated on rising interest rates). 27 The maximum expected loss for the universe is 7.4% under Scenario 6. CMBS Refinance Risk: Vintage Analysis Across Multiple Economic Scenarios “There is a common understanding within the industry, that refinance risks exist due to the overwhelming use of balloon structures, but the potential significance of material shifts in lending underwriting criteria was likely underestimated.”


CRE Finance World, Summer 2013
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