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<a href="http://www.ft.com/cms/s/0/7a415fae-5f60-11de-93d1-00144feabdc0.html#">Worries over systemic risk in CMBS sector</a>
<em>Even as conditions in many parts of the credit markets have improved, a big question mark hangs over one large part of the market that is still dysfunctional: the market for securities backed by commercial mortgages.
Behind the scenes, regulators are acutely aware that the commercial real estate market is one of the few potential remaining sources of systemic risk if the financing problems cannot be fixed.
William Dudley, president of the Federal Reserve Bank of New York, highlighted this this month: ?The revival of the commercial mortgage-backed security market is essential to stabilising the commercial real estate market.
?If the availability of funding for this market is not restored, the downturn in commercial real estate valuation and the losses for the holders of these assets will be greater. This will, in turn, likely further constrain credit availability. That?s the vicious cycle we want to lean against.?
The clock is ticking with some of the $3,400bn of loans made to property developers for anything from urban office tower blocks to shopping malls across the US due for payment.</em>
http://www.ft.com/cms/e164bb78-5f50-11de-93d1-00144feabdc0.jpg
<em>Although the CMBS sector faces a series of downgrades ? bringing echoes of subprime mortgage-backed securities ? there are important differences.
First of all, only a quarter of commercial mortgages are securitised ? the proportion was much higher for subprime mortgages. Also, there was not the same amount of derivatives and securities linked to commercial mortgages.
The subprime mortgage collapse was so damaging because billions of dollars of securities were linked to their value through derivatives. The commercial mortgage issue is vital for US banks, which have much reduced capacity on their balance sheets, meaning they are not as able to roll over and refinance maturing loans. In addition, there are concerns about losses once properties that are not in a good state have to be refinanced.
In other words, there will be properties where the value is far less than the loan, and additional equity has to be found.
?At least two-thirds of the loans maturing between 2009 and 2018 ($410bn) are unlikely to qualify for refinancing at maturity without significant equity infusions from borrowers,? says Richard Parkus, analyst at Deutsche Bank.
<strong>
?Bank and life companies, which make up approximately 50 per cent and 10 per cent of the [$3,400bn commercial real estate] market, respectively, must also be considered,? said Mr Parkus. ?The same combination of deteriorating underwriting standards and excessive price inflation were operating in bank and life company lending [as in the CMBS market].?</strong>
The Fed?s initial plans are aimed at funding new securities backed by new mortgage loans. The complication is that the decision to lend commercial mortgages, unlike credit card or auto loan backed securities, is very closely linked to the interest rates available on existing CMBS. The collapse of the sector and the departure of numerous buyers of CMBS led to a huge increase in interest rates, and these remain high.</em>
Where are all those people from 06 and 07, who thought I was nuts the CRE would collapse? I would sincerely like to ask them how they feel about CRE now. I tried to warn them, you need jobs to fill office space and for consumers to spend money. I hope some at least listened a little, and did some deeper research than the crap they got from CBRE and Voit, because man... were they wrong.
<em>Even as conditions in many parts of the credit markets have improved, a big question mark hangs over one large part of the market that is still dysfunctional: the market for securities backed by commercial mortgages.
Behind the scenes, regulators are acutely aware that the commercial real estate market is one of the few potential remaining sources of systemic risk if the financing problems cannot be fixed.
William Dudley, president of the Federal Reserve Bank of New York, highlighted this this month: ?The revival of the commercial mortgage-backed security market is essential to stabilising the commercial real estate market.
?If the availability of funding for this market is not restored, the downturn in commercial real estate valuation and the losses for the holders of these assets will be greater. This will, in turn, likely further constrain credit availability. That?s the vicious cycle we want to lean against.?
The clock is ticking with some of the $3,400bn of loans made to property developers for anything from urban office tower blocks to shopping malls across the US due for payment.</em>
http://www.ft.com/cms/e164bb78-5f50-11de-93d1-00144feabdc0.jpg
<em>Although the CMBS sector faces a series of downgrades ? bringing echoes of subprime mortgage-backed securities ? there are important differences.
First of all, only a quarter of commercial mortgages are securitised ? the proportion was much higher for subprime mortgages. Also, there was not the same amount of derivatives and securities linked to commercial mortgages.
The subprime mortgage collapse was so damaging because billions of dollars of securities were linked to their value through derivatives. The commercial mortgage issue is vital for US banks, which have much reduced capacity on their balance sheets, meaning they are not as able to roll over and refinance maturing loans. In addition, there are concerns about losses once properties that are not in a good state have to be refinanced.
In other words, there will be properties where the value is far less than the loan, and additional equity has to be found.
?At least two-thirds of the loans maturing between 2009 and 2018 ($410bn) are unlikely to qualify for refinancing at maturity without significant equity infusions from borrowers,? says Richard Parkus, analyst at Deutsche Bank.
<strong>
?Bank and life companies, which make up approximately 50 per cent and 10 per cent of the [$3,400bn commercial real estate] market, respectively, must also be considered,? said Mr Parkus. ?The same combination of deteriorating underwriting standards and excessive price inflation were operating in bank and life company lending [as in the CMBS market].?</strong>
The Fed?s initial plans are aimed at funding new securities backed by new mortgage loans. The complication is that the decision to lend commercial mortgages, unlike credit card or auto loan backed securities, is very closely linked to the interest rates available on existing CMBS. The collapse of the sector and the departure of numerous buyers of CMBS led to a huge increase in interest rates, and these remain high.</em>
Where are all those people from 06 and 07, who thought I was nuts the CRE would collapse? I would sincerely like to ask them how they feel about CRE now. I tried to warn them, you need jobs to fill office space and for consumers to spend money. I hope some at least listened a little, and did some deeper research than the crap they got from CBRE and Voit, because man... were they wrong.
