Black Knight creates model to measure CMBS prepayment risk

Black Knight introduced a model to gauge prepayment speeds and credit risk for investors that purchase commercial mortgage-backed securities.

Black Knight's similar single-family product shaped the AFT Multifamily Model.

This new multifamily model forecasts mortgagor behavior at the loan- or pool-level for apartment buildings, senior housing, low-income housing and other similar properties.

"Given the significant size of investments involved, it's essential that those tasked with bond pricing, valuation and hedging have access to a model that can best capture the unique and dynamic aspects of the multifamily market," Ben Graboske, president of Black Knight Data & Analytics, said in a press release. "Our new AFT Multifamily Model provides deeper visibility into loan behavior to support better decision-making and reduced risk."

When looking at loans secured by multifamily properties, investors want to verify the rental income potential net of expenses is able to meet or exceed the mortgage obligation.

With the new model, CMBS holders are able convert borrower prepayment penalties into adjustments to the refinance incentive calculation. This allows them to measure the impact of a prepayment penalty on the likelihood of an early loan payoff.

The updated debt service coverage ratio calculation measures a borrower's ability to successfully generate enough cash flow to cover the mortgage payment based on key macroeconomic and loan characteristics.

In addition, the model includes a Multifamily Price Index that allows investors to make more accurate mark-to-market valuations by incorporating data down to the ZIP-code level.

Black Knight will then take that MPI data to create a current loan-to-value estimate for the property allowing the investor to examine the equity and valuation, which are crucial factors in forecasting the risks of a refinance — whether for cash-out or rate/term — and turnover, as well as default and loss projections.

Other factors the model incorporates include the effects of unemployment rates, plus the current occupancy rate and projection for the future as well as looking at the effects of payment shock for hybrid adjustable-rate loans and balloon terms.