In general, things have been looking up for commercial mortgage-backed securities, however, those considering investing in the space should be sure they understand the nuances involved as well as the big picture.

For example, CMBS loan loss severity fell below 40% for the first time in January since April of last year, according to Trepp. Along with this, the volume of CMBS conduit loans liquidated in January rose to the third highest total since Trepp first began tracking this data in January of 2010.

“There's been improvement in multiple pockets of the market,” stated Manus Clancy, the senior managing director at Trepp. “We don't want to overemphasize this loss severity number too much, but it is part of a broader trend which is providing some sense of optimism in the market.

“We saw some other positive signs this month,” he said. “We saw tremendous spread tightening in January, so when you take that, along with the fact that loss severities dropped a little bit and special servicers resolved so many loans, you have an arc there which says things are looking better than they did three months ago.”

“You're also seeing a pipeline develop of new issuance that people really didn't anticipate three months ago. They thought we really were in a stalled pattern,” Clancy added. “It is slowly but surely getting back to where it was last spring before the wheels came off over the summer.”

However, how optimistic things appear depends on what aspect of the market you are looking at, Clancy noted.

“I would say its cautious optimism on the new issue side,” he said. “I would say you could argue that the rally in the AJ sector in the secondary market bordered on frothiness. I mean the rally was so powerful in the middle of the month that it was defying gravity.”

However, the latter optimism is, of course, subject to the vagaries of the market, Clancy noted.
“That could all go out the window with a lousy jobs report,” he noted.

When asked whether loss severity and the rate of liquidations will continue to get better, as Clancy often says, “One month doesn't really make a trend.”

But it’s a fair statement that, “It was a very active month for special servicers in terms of resolving loans. It means they are keeping their foot to the pedal to try to get this inventory of stuff cleared,” said Clancy. “That will be important throughout 2012 because we should see more and more loans going into special servicing, more loans becoming delinquent and the special servicers' plate will not be getting any less full.”

Being able to “continue to process these things efficiently and bring them to resolution will be important for the market to clear away this inventory of distressed assets,” said Clancy.

As far as whether the reduction in loss severity turns out to be a trend, he said, “We'd like to see that number which was 39% this month stay in that range for three or four months before we started to say we saw…firmer pricing. But we'll certainly take it, 39% is much better than the previous month and given how many loans we are talking about and how much volume there is it's a meaningful number.”

To learn about private banking loan scenarios, please visit: http://californiamortgagedirect.com/Private_Banking_Loan_Scenarios

For more information about Mortgage-Backed Securities (MBS), go to: http://www.sec.gov/answers/mortgagesecurities.htm