EFFECTS OF POOLING STRATEGIES ON THE PERFORMANCE OF CMBS

Abstract

This study examines how the pooling processes affect performance of CMBS in terms of returns, default and prepayment through analysing the individual mortgage loan characteristics, distribution and concentration factors as well as the deal level characteristics in CMBS deals. Phillips (2003) stated that multi-asset CMBS deals are generally able to produce larger amounts of highly rated securities as compared to those in typical single-asset deals. Therefore, this paper analyses the effects of location and property type concentration factors. If the commercial mortgages are homogenous or highly correlated, pooling actually exposes mortgages to systematic shocks and increases credit risks of CMBS. The results show that most of the factors are statistically significant, which highlights the importance of pooling process and how pooling strategies are important for issuers to enhance returns and minimise risks. In particular, location concentration has negative impact on CMBS performance, since an increase in the location concentration causes lower returns and increases the prepayment and default risks. The results also show that as the age of CMBS pools increases, there tends to be a decrease in diversity within the CMBS pools due to scheduled maturities, assets amortising at different rates, as well as prepayment and default, this paper extends the study by analysing the effects of age of the deals and the change effect of WAC over time. The results have shown that the older the CMBS loans, the higher the yield of the CMBS and the higher the tendency of prepayment will be. Deal level characteristics such as DSCR are also found to be important factors in determining prepayment and default risks, as the results have shown that a decrease in DSCR can similarly lead to an increase in prepayment and default risks.