To prevent a re-run of the 2008/09 collapse in the US financial system, the US Fed again stepped into the agency-MBS market, after the COVID-19 shock emerged in Q1, buying almost $600 billion of agency-Mortgage Backed Securities in Q2 2020 alone.

However, this support has not extended across the economy. Other than the Term Asset-Backed Securities Loan Facility program (TALF 2.0), covering legacy AAA CMBS, Government and Fed rescue programs have been very limited in commercial real estate/CMBS. This is to avoid the criticism the Fed has caused moral hazard in financial markets by buying assets indiscriminately.

With the Fed not buying non-agency CMBS, COVID-19 lockdowns structurally challenging some sectors, and other programs not supporting them, non-agency CMBS are left more exposed to the pandemic-related recession.

In this paper:

  • We assess the impact on non-agency CMBS defaults, using our Yield Book model to simulate the impact of commercial real estate (CRE) price declines of 20%, 30% and 40%, over the next year. (CRE prices fell by 38% during the GFC, from peak to trough.)
  • We find a 40% CRE price decline gives CMBS losses close to the levels seen for 2007/08 loan vintages after the GFC.
  • But we note that the impact of the COVID-19 recession is concentrated in sectors that comprise almost 70% of CMBS collateral. This skews non-agency CMBS default risks to the high side of the GFC outcomes, when CMBS generally suffered less than RMBS.