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.
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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.
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