Monday, March 16, 2009

Should Commercial Mortgage Backed Securities Be Mark-to-Market?


Posted by: Chris Shanks
Investment Analyst

Chris is responsible for analyzing, valuing and marketing properties for the NAI Alliance Investments Team. He is also involved in the disposition and acquisition of investment properties for clients.

By definition a security that is mark-to-market is one that is valued continuously at a current market value. This accounting principle is what has arguably led to the downward spiral of the financial sector as well as the nationwide real estate market. Many companies who owned commercial mortgage backed securities (CMBS) have had to write down billions of dollars in assets because of the effects of subprime lending. Is it fair to value real estate the same as common stock?

Many will agree that a mark-to-market approach for real estate backed securities is not a perfect method, especially in light of what has happened in the last year. Many securities have the possibility of reaching a zero value, which is something that rarely, if ever, occurs in real estate. The main reason is that real estate has an intrinsic value; it costs money to be built, it is occupying land that is scarce, and it has the potential for future cash flows. Also, common stock trades on a daily basis in volumes that usually reaches into the hundreds of millions in transactions, a commercial real estate property may not trade hands for five years. The lack of real time data and an inherently lower standard deviation makes it difficult to truly value (CMBS) with a mark-to-market approach. I’m not na├»ve enough to say I have the answer and am ready to propose it, however I do think we need to take into account the nuances that separate the asset classes and devise a better method of valuation.

4 comments:

Anonymous said...

Cool argument

Stephen peterson said...

Well said...here i have also written another article on commercial mortgage backed securities. hope it will give more knowledge.

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