Morningstar Research-Quality of CMBS Research and Ratings Report November 2013








When people talk, listen completely. Most people never listen.
Ernest Hemingway



November 2013 Managing Director – CMBS Analytical Services: Frank A. Innaurato 

Liquidate Loans and Expected Loss Analysis

As part of Morningstar’s monthly CMBS review process, each Morningstar analyst is responsible for analyzing multiple areas of real state credit risk related to the underlying collateral assets. At the forefront of its analysis is a review of a transaction’s specially

serviced or watchlisted assets. Morningstar also aims to inform its clients of potential loan-level losses and their impact on the rated bonds, as well as the potential for future defaults and the impact of future losses. These factors are applied by Morningstar to determine the credit risk of a particular loan and the corresponding effect of this credit risk on a CMBS transaction.

In order to estimate losses, Morningstar utilizes an income approach to capitalize a property’s net cash flow into a value. If necessary, Morningstar re-estimates a property’s cash flow through a pro-forma or discounted cash flow analysis using the reported data from operating statement analysis reports (OSAR reports) and other third party collected data. Capitalization (“cap”) rates are derived from multiple sources, including Morningstar’s proprietary database of cap rates collected from certain legacy CMBS transactions and new issue CMBS transactions, and supplemented by other third party collected data. In addition, Morningstar may consider conditions and prospects of the underlying real estate market and a review of the tenants in the building. In addition to the preceding approach, Morningstar generally performs a re-estimate of the value of the underlying property using the sales comparable approach (i.e., comparable price per square foot). For this analysis, numerous observations of distressed sales from

CMBS loan liquidations, as well as numerous distressed reappraisals of CMBS properties on loans in special servicing, guide Morningstar’s valuation metrics. Morningstar may also access sales data collected from multiple external sources. Once a final estimate of the underlying property value is completed, this value is compared to the total loan exposure, fully burdened for

advances, and other costs of foreclosure, to arrive at an estimate of the likely loss from liquidation. The final output from this analysis is an estimate of the expected loss to the trust and an estimate of the time until liquidation. We have developed an internal query to investigate a sampling* of the “accuracy” of Morningstar’s loss estimates over time. For our purposes, “accuracy” is a comparison of all loans which were liquidated in a given time period (based upon the most recent remittance data available as of the date of query) to the loss forecasts for these loans. We derive our comparison over a 1-month, 6-month, 12- month, and 24-month timeline by looking back at our specific loss estimates during the applicable period, and comparing these to the actual realized loss, displayed in Table 1 below. We emphasize that the closer a loan gets to liquidation the more information is available, such as information on the loan’s workout status and appraisals. Note: We have removed “noise” from the calculated results for loans with a loss that was realized and not forecasted (i.e., workout fees, other resolutions), and vice versa. Therefore, any variance between our loss forecast and the actual realized loss is calculated as

follows: Projected Loss at Time X (1-month, 6-months, 12-months, or 24-months prior to the realized loss) less the actual realized loss, divided by the actual realized loss, equals the accuracy of loss estimate (variance).


* (excluded top 5 and bottom 5 variances, as well as loans with no loss projection)


Table 1 – Actual vs. Forecasted Losses for the May 2013 – Oct. 2013 Remittance Period






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Walter Unger CCIM, CCSS, CCLS

I am a successful Commercial Investment Real Estate Broker in Arizona now for 15 years and I worked with banks and their commercial REO properties for 3 years. I am also a commercial landspecialist in Phoenix and a Landspecialist in Arizona.





we are at on the a rise of the cycle in Commercial Real Estate.  so there is only one way and it’s called we are going up and now is the time for you to expand, upgrade or invest in Commercial Properties in Phoenix.  The prices on deals I may get you will not be around forever.



  We barely could give land away the last few years, but times are changing.  Even in those meager years, I sold more land across the state than most other brokers. Before the real estate crash I was a land specialist in Arizona with millions of dollars of transactions, but then I had to change and also sell other commercial investment properties, which was fun, but I am a Commercial Landspecialist in Arizonal, a Commercial Land Specialist in Phoenix and love to sell land, one acre to thousands of acres.


If you have any questions about Commercial Investment Properties in Phoenix or Commercial Investment Properties in Arizona,  I will gladly sit down with you and share my expertise and my professional opinion in Commercial Properties in Phoenix or Commercial Properties in Arizona with you.Obviously I am also in this to make money, but it could be a win-win situation for all of us. 


Please reply by e-mail or call me 520-975-5207 (cell)  602-778-5110 (office direct).




Thank You



Walter Unger CCIM

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Kasten Long Commercial

2821 E. Camelback Road, Suite 600

Phoenix, AZ 85016

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