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KIC000030 - Commercial Mortgage-Backed Securities(continued...

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Commercial Mortgage-Backed Securities (continued) o Stress Testing Strnctures D All analysis of the credit quality of the tranches in a CMBS involves looking at the commercial loans on a loan-by-loan basis. o Rating agencies and analysts will then stress test the structure with respect to a combination of default and prepayment assumptions. U'fl)"''il"'{' :oW? ,,, ;;d",'~J", "''',r",...'''''' ~,,,,'''"''f',dl 11 Commercial Mortgage-Backed Securities (continued) o Stress Testing Structures o In stress testing default risk, the following three key assumptions are made The first is the annual rate of defaults as measured by the conditional default rate (CDR). Analysts often assume 3 CDR of2% to stress lest strong deals and 3% to test weaker deals . II A second important assumption is the timing of the defaults. A default can occur sometime early in the term of the loan or at the balloon dote (wllt'n refinancing is required). iii. A third important assumption is the per-centage of the loan balance that 'Will be lost when a default occurs This measure is called the Joss se'·erity. ~P'I'i¢,,.,;ro,~~,,,,,,,,,,.,,,
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