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Remember when a 1% default CMBS default rate was a big deal? As we all now know, those are the good old days. We are heading for a $12% default rate by year’s end, if Fitch Ratings is correct in its latest analysis. The company has reported there will be $100 billion in special servicing by that point, up from the current $50 million. Retail and hotel are the most troubled asset classes. For all that, existing CMBS has been experiencing a rally, with year to date returns more than 20% over benchmark government securities. Some of that is due to rising equity markets and a growing sense that a recovery – at least on Wall Street – is approaching. Some of it is also due to the unprecedented government programs thrown at the problem, such as TALF and the soon to be launched PPIP. Still, though, few expect to see new issuance even come close to rivaling the halcyon days of the early 2000s – at least until certain safeguards and changes are in place. The rating agencies for one. Last week the White House released a plan to reform credit rating agencies; its provisions include barring rating firms from consulting with companies they rate and disclosure of “pre-ratings” before a firm is picked. Some are saying it doesn’t go far enough; others protest yet another government regulatory layer – the plan also calls for a separate office to oversee the rating agencies. Like with so many of these new programs it is difficult to say whether the cure is worse than the illness, especially with financial metrics all over the board: a 12% default rate versus a 20% return year to date. Can anyone say definitively either is solely the result of misguided/insightful government intervention.

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