Simpler Is Better

Going forward, there will be a different underwriting standard,
according to Gyourko. "We got into a situation where there was so much
demand for yield that you could end up with a poorly underwritten
product. And there would be some bond desk out there that would buy it.
That's going to go away."

He also believes that buyers of higher-yielding CMBS tranches, the
"B-piece buyers," will be controlling the market. Since those buyers
stand in the first-loss position if loans go bad, they historically
have had the authority to "kick out" certain loans from CMBS deals, and
therefore helped to shape the overall deal. In the future, Gyourko
says, "it clearly is going to matter more to investors who they are."

Changes may be in store for other players in the CMBS market as
well. The ratings agencies -- Moody's, Standard & Poor's and Fitch
-- have come under fire within the context of the housing crisis for
the manner in which they operate and get paid. As for the fallout for
CMBS, "I honestly don't know, but something's got to change, because
they failed, and that process failed," Gyourko says. Changing the
"incentive structure" for the rating agencies has been talked about,
such as having buyers pay for the ratings rather than the issuers.
"More likely is that they [would] only rate simple, more transparent
issues. That also tells you what CMBS will look like in the next few
years -- simpler, better underwritten, regular CMBS, as opposed to more
complex [collateralized debt obligations]."

According to Mandzy, many in the industry feel the ratings agencies
are being scapegoated, but that a perceived conflict of interest is a
legitimate concern. Yet many institutional investors are restricted by
their charters to buy only bonds rated triple-A by the agencies. "CMBS
is probably the most transparent structured finance market that
exists," Mandzy says. "You do your due diligence based on data and how
it did historically. In CMBS the data set is relatively robust, and at
the end of the day you still have a property that generates income."

In June, the Commercial Mortgage Securities Association (CMSA)
announced that a study it commissioned found that CMBS were mispriced
"compared to their fair value and returns relative to their risk.

"CMBS will perform well in a deteriorating recessionary
environment," the statement said. "Current spreads for most CMBS [past
deals] are still far wider than their fair value, [which is] an
irrational market reaction."