Anyone who has originated a CMBS conduit loan owes it to himself to read The Big Short, by Michael Lewis and The Greatest Trade Ever, by Gregory Zuckerman. These two books chronicle the financial meltdown that occurred in 2008 resulting from the collapse of residential mortgage-backed securities filled with sub-prime home loans. The Big Short, is the more entertaining of the two books; it describes the structure of the securities in simple terms, using the floors of an office building as an analogy for the bond structure. For example, the basement and first floor are the first loss positions in the author’s analogy, and the top floors are the most senior positions. The Greatest Trade Ever is more technical; it spends time on the research John Paulson and his team performed (then took advantage of) on home loan markets and borrower characteristics that suggested an enormous waive of defaults was brewing.
“I read the books with CMBS in mind,” Michael Sneden said. “Although the results were not quite as bad, I found a parallel with ‘no doc’ home loans (often unkindly referred to as liar loans) and ‘option ARMs’ (where the borrower has a low ‘teaser’ start rate and negative amortization) to ‘pro forma loans’ and ‘interest only’ loans that were written in CMBS. CMBS is paying a price for this excess, but not nearly as high a price as being paid for the excesses that occurred in home lending. The books will fascinate those in our industry to a greater extent than the average reader.”
