Is COVID Revealing a Virus in CMBS 2.0?

Commercial loan valuations crucially depend on accurate loan income, but underwritten income on CMBS loans is commonly overstated relative to actual property income. Consistent with these differences being originator specific, income overstatement in CMBS 2.0 deals varies widely and persistently across originators, is priced by originators, related across property types within an originator, predictable ex-ante, and accompanied by inflation of past financials. Risk-retention and associated regulation had no discernable effect on income overstatement. Originator income overstatement is highly predictive of pre- and COVID-period loan distress. Overall, recent marketstresses reveal large systemic differences in underwriting standards across originators.