Rotten Reputation

There's a new site that has recently been launched. It is a mash-up that uses the Google Maps api and adds on a layer that allows users to comment on their neighbours. The comments are usually negative and the site is called Rotten Neighbor.

I'm not sure how useful this will be. It will simply be a site to vent anger and hatred; or as a way to play pranks on friends. It's fun as a bit of entertainment but I doubt it will be a useful tool to help pick a neighbourhood in which to live. But it still may be successful in terms of web traffic!

This site does illustrate an interesting point however. Our reputations are vulnerable online. If we do not have a strong online presence, we do not have a voice to defend against sites like these. As the web becomes increasingly interactive and social, it will be very easy to trash someone else. As individuals we need to be involved in the discussion in order to protect our own reputation.

Take these two landlord reviews for example:




Mold Problem:

Landlord renovated basement without permits. Black mold problem that has spread throughout three units of house, making previous tenants sick. Building not maintained well, freezing cold in winter. Landlord is also quite sexist and derogatory to female tenants.




Tight Ass:

The owner is a slum lord. Doesn't like to spend money to fix his investment.

Who knows if these statements are true or not. The landlords are unlikely to know that these comments exist and they're unable to give their side of the story.

Landlords rely on their reputation to attract and retain tenants. To protect themselves, they need a strong online presence. They need to be aware of where discussions that affect them are happening. As in the real world, landlords need to be approachable and responsive online. If landlords are not available to engage in an online conversation, if they can't address their critics, disgruntled individuals will take their comments elsewhere.

What is CMBX exactly?

If you search for information on this index, you will see that it is used a great deal on the web but I have not found a simple explanation for what it actually is and the precise role that if plays in finance. Here's what I have been able to piece together.

The CMBX is an index published by a company called Markit . It is simply an index that tracks performance of several baskets of bonds. The CMBX AAA index tracks the yield on a group of triple A bonds that are backed by real estate loans.

So, first we need a quick explanation of yield. Current Yield is the ratio of the annual interest payment and the bond's current price. If a bond costs $100 dollars and has an annual coupon Interest payment) of $10 the yield is 10%. If the price falls to $80, then the yield increases to 13%. The value of the bond would fall if the market believed that the bond became more risky. Riskier investments have a higher yield to compensate the holder for the risk of default.

To make things more confusing, the CMBX does not track the bond yields directly. The index is expressed as a 'spread'. In this case this is the difference (spread) between the yield of the bonds being tracked and the current yield offered by government bonds (commonly called the 'risk-free' rate).
The result is that when the bond prices fall, the spread increases and the index goes up. A high index value means that the financial community sees these bonds as being at a higher risk of defaulting. We can see from this chart that the spread for triple A rated bonds has increased from less than 0.5% in October to over 2% in February.

And how is the CMBX used? It is not a product you can buy directly. See CORRECTION in comments. This index is used as a benchmark for pricing other financial products: Credit Default Swaps. A CDS acts like an insurance policy on a bond. The seller of the product will assume the default risk of a bond. If the bond defaults, the seller will pay the buyer the value of the bond. For this insurance, the buyer pays the seller a periodic premium that is related to the riskiness of the bond. And how do they agree on the riskiness of the bond? The use the CBMX index!

You don't have to own the bond in question to buy a CDS against it. If you want to, you can bet against the commercial real estate industry. When real estate companies default, you will collect a windfall!

CMBX Index

A recent Wall Street Journal article discusses the CMBX index and it's use in predicting the default risk of commercial real estate. Even though there are very few current defaults, this index now suggests that there is trouble to come.

This is a derivative index that is based on the pricing of bonds backed by commercial real estate. In simple terms it represents to cost of insurance against default - which is a good measure of risk.

The alarming thing is that this index has been going up of late which would seem to indicate a stormy future for commercial real estate.

This chart shows the index for AAA rated commercial real estate bonds:

Tech Note: I could not find this index on popular finance sites. The above chart is published through an iframe that is fed from Markit.com, the creator of the index.