Trepp Research Report: Forecasting Losses in CMBS as CECL Approaches
Trepp published its Forecasting Losses in CMBS as CECL Approaches Report that examines the loan side of CECL using a portfolio of non-delinquent, single property loans from public conduit CMBS deals.
NEW YORK, Aug. 28, 2019 /PRNewswire-PRWeb/ -- Trepp, LLC, a leading provider of information, analytics, and technology to the structured finance, commercial real estate, and banking markets, released its Forecasting Losses in CMBS as CECL Approaches Report. The full report can be accessed here.
As January 2020 approaches, SEC reporting banks, insurance companies, mortgage REITs, and other lenders are quickly ramping up for their first reporting period under the new loan loss reserving standard, Current Expected Credit Loss (CECL). These firms will have to reserve for life of security expected losses for any held to maturity debt securities starting next year.
"In Trepp's case, clients are interested in CRE loans and, for those longer-term bond investors holding to maturity, CMBS bonds," said Director of Research & Applied Data, Joe McBride. "This piece focuses on the loan side only but future pieces will include more bond specific analysis."
Last summer, Trepp released the second round of current expected credit loss (CECL) estimates for the CMBS universe. The numbers are based on output from the Trepp-Default Model (Trepp-DM) which uses an econometric probability of default (PD), loss given default (LGD), expected loss (EL) model with an extended macroeconomic scenario. Last time around we used a discounted cash flow (DCF) methodology to generate these results. The Financial Accounting Standards Board (FASB) has since clarified how to discount loss-adjusted cash flows but, in the meantime, many lenders have eschewed the DCF method completely due to its complexity. Since most will be using an undiscounted expected loss approach, we did the same in this piece.
Trepp-DM produces a PD, LGD, and EL for each loan based on forecasted macro factors like unemployment rate, interest rates, liquidity, and CRE price index as well as loan-level factors like loan to value (LTV), debt service coverage ratio (DSCR), property type, and region.
Now that CECL is a few months away, most large lending institutions are putting the finishing touches on their internal systems and controls to do the CECL calculation for all asset classes on a quarterly basis. Alternative lenders and smaller publicly traded firms are slightly behind them, finalizing models and working out kinks in their data. Models and data will have to be well documented, transparent, and controlled.
For additional details on historical Trepp data for CMBS losses and how it can impact CECL preparation, download the complete Forecasting Losses in CMBS as CECL Approaches Report. For daily CMBS and regulatory commentary, follow @TreppWire on Twitter.
SOURCE Trepp
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