Sense on Cents

The commercial mortgage market has been around a long time; the commercial mortgage-backed securities (CMBS) market has only been around for little more than a decade.  The growth of the CMBS market, in which the actual mortgages are pooled and securitized, has been significant in that it brought new pools of capital into the commercial real estate market. 

Not unlike the residential mortgage market or the corporate loan market, the commercial mortgage market performed fine as long as the underwriting process maintained the necessary discipline. Much like other sectors, however, the commercial mortgage market is now sufferring as lax underwriting standards are catching up with it. Who wrote these loans with lax underwriting standards? Wall Street banks. These banks launched mortgage conduits which originated commercial mortgages for purposes of pooling and selling via the securitization market. 

Friends of mine in the commercial real estate market have advised me of very aggressive pricing of many loans along with shoddy underwriting. As a large percentage of those loans are now approaching a refinancing date, the prospects of refinancing are challenging.  In turn, the likelihood of rising defaults are increasing. (more…)