Risk Rating Pricing
Mortgage Risk Rating
Mortgage risk rating is the process by which CMLS recommends the appropriate credit spread to the client for the purposes of determining the fair market value of the mortgage.
CMLS risk rates virtually every commercial mortgage loan type including fixed and floating rate term mortgages, interim construction mortgages, second mortgages, mezzanine loans, lines of credit and others. CMLS utilizes one of two risk rating systems depending of the type of loan.
Weighted Scoring System
This system is best suited for fixed rate term mortgages, the most common commercial mortgage type. Under this system, CMLS reviews each mortgage on an annual basis to assign a risk rating which reflects the overall level of risk associated with the loan. We review the current operating conditions of the subject property along with a variety of predetermined quantitative and qualitative factors to determine a total credit score.
Judgmental System
No scoring system can be valid across the entire universe of commercial mortgage investments as there is simply too much variability in circumstances. As such, strictly applying a rules based methodology to mortgage valuation will not lead to valid results. Examples of situations that tend not to lend themselves to a scoring system include second mortgages, construction mortgages, some single-tenant properties, mezzanine financing, and properties that are experiencing temporary adverse conditions.
To maintain consistency across all judgmental valuation assignments, CMLS has developed a comprehensive framework of analysis and documentation to support each conclusion. A panel of experts, working within the pre-determined framework, assesses each file and renders a recommendation based on all available data.
Development of the Credit Spreads used in both the Weighted Scoring System and the Judgmental System
The key to a mortgage risk rating system is not only a rigorous and well accepted rating methodology but also valid market data. CMLS obtains such market data from many sources:
- Actual transactional data from the lending programs of our valuation client base, currently representing in excess of $5.1 billion of commercial mortgages
- Market knowledge from our affiliate Penmor Mortgage Capital Corporation
- Comprehensive industry interviews from mortgage lenders and investors from across Canada
- Review of corporate bond spreads
- Review of CMBS spreads
Based on the results of the above proprietary research we establish a matrix of spreads covering the commercial mortgage universe. We believe the combination of proprietary data and research together with our 35 years in the business makes us Canada’s leader in commercial mortgage valuation.
Mortgage Pricing
Mortgage pricing is the process by which CMLS calculates the fair market value and the resultant price of a mortgage. The price is then used to mark the mortgage to market.
CMLS generates mortgage prices by using industry-standard calculations and bond data sources to calculate the net present value of the mortgage discounted at the sum of the risk free rate plus the credit spread developed from our risk rating work or as provided by the client.
Mortgage pricing can be provided with a daily, monthly or quarterly frequency. Outputs include the price (expressed out of 100) together with the resultant discount or premium and other standard fixed income metrics such a duration, average duration and others.
For more information about commercial mortgage spreads, mortgage valuation services, mortgage servicing or any other related matter please do not hesitate to contact us:
| Chris Brossard, CA President (604) 488-3858 chris.brossard@cmls.ca |
Beverly White Vice President (604) 488-3869 beverly.white@cmls.ca |
| Mark Achtemichuk, CA, CFA Managing Director (604) 637-0874 mark.achtemichuk@cmls.ca |
David Nygren, CFA Associate Director (604) 488-3850 david.nygren@cmls.ca |
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