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Emboldened by their strong competitive position, B-piece buyers are becoming increasingly aggressive about demanding the removal of marginal loans from the pools that back commercial MBS issues.
Buyers of first-loss classes say that in recent months they have noticed a significant deterioration in loan quality, which they attribute to the highly competitive lending environment. As a result, they are scrutinizing loans more closely and refusing to buy into deals unless offending loans are removed or discounted in value. "We're kicking out more loans than ever .., because [issuers] are making stupid loans," said an executive at a major B-piece-buying firm.
Issuers contend that investors are exaggerating the degree of loan-quality problems. They argue that B-piece buyers are using their increased leverage to remove loans with the slightest hint of a potential problem. "To the extent there is a narrow market, I believe they are just attempting to flex their muscles;'...