Here’s one way to tell if a tower is in trouble

If appraised values are way bigger than what ratings agencies come up with, a building could be more likely to default

TRD NATIONAL /
Feb.February 11, 2019 01:00 PM

(Credit: Moody’s Investor Service, Trepp and Unsplash)

Want to understand if a major property is at risk of defaulting on their loans? One way to tell is to look at the difference between private appraisals of the building and those done by ratings agencies.

An analysis of large commercial mortgage-backed securities deals by The Real Deal found that ratings agencies routinely shave more than 20 percent off bank appraisals in the lead-up to bond offerings. In some cases, they may shave up to 50 percent when trying to gauge the true value.

Part of the difference is that ratings agencies look at the worst possible outcomes over the course of a 10-year loan when they give a valuation, said Moody’s CMBS analyst Kevin Fagan. And, according to a recent Moody’s study of loans from years 2002 to 2007, the larger the discrepancy between appraiser values and ratings agency values, the more likely the chance of default.

“For appraisers, the market valuation is about one point in time — often tied to a sales price,” Fagan said. “For ratings agencies, we’re looking for the very stressed version of what may happen in the event of default of these loans that results in a bond loss … the higher the rating, the lower our assumed stress value.”

The root of the problem, insiders say, is a conflict of interest. Appraisers are supposed to be impartial. But they are hired and compensated by people who aren’t, which makes them vulnerable to pressure.

To see the full story from the February issue, click here.


Related Articles

arrow_forward_ios
With a cooling trade war, stocks perform well, including real estate. (Credit: iStock)

Real estate stocks push up this week as U.S.-China trade tensions ease

Real estate stocks push up this week as U.S.-China trade tensions ease
416 West 25th Street and Maverick Real Estate Partners principal David Aviram (Credit: Google Maps and LinkedIn)

Chelsea landlord claims “predatory” lender is charging a crippling interest rate as punishment after losing foreclosure case

Chelsea landlord claims “predatory” lender is charging a crippling interest rate as punishment after losing foreclosure case
Related chairman Stephen Ross and Related Companies Portfolio CEO Richard O’Toole withBronx Terminal Market and Time Warner Center (Getty, Google Maps, Wikipedia)

Related lays out $200M debt settlement plan for Tel Aviv bondholders

Related lays out $200M debt settlement plan for Tel Aviv bondholders
Federal Reserve Chairman Jerome Powell (Getty)

Real estate stocks benefit from second quarter rally

Real estate stocks benefit from second quarter rally
The Seagram Building at 375 Park Avenue with a photo illustration of RFR's Aby Rosen (Getty, Google, iStock)

Aby Rosen to build sprawling gym in Seagram Building

Aby Rosen to build sprawling gym in Seagram Building
(iStock)

TRD Insights: The 56 REITs whose bonds the Fed will buy

TRD Insights: The 56 REITs whose bonds the Fed will buy
Barry Sternlicht (Getty)

Barry Sternlicht predicts “tipping point” for NYC

Barry Sternlicht predicts “tipping point” for NYC
Square Mile Capital’s Craig Solomon and Hackman Capital Partner's Michael Hackman with Silvercup Studios at 42-22 22nd Street in Long Island City (Hackman; AAK via Wikipedia Commons)

Hackman, Square Mile in talks to buy Silvercup Studios

Hackman, Square Mile in talks to buy Silvercup Studios
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...