I’ve been reporting on Commercial Mortgage Backed Securities today and the fact that despite relatively low rates of default on commercial loans, investors are still running for the hills. The trouble, as with everything in today’s economy, is the unknown. Investors think CMBS is the next shoe to drop.
"As the market is now deteriorating, as vacancy rates are rising and as asking rents are moderating and in some places declining, gaps in cash flows, how much money is the property producing versus what the debt service payments are, that gap is widening in many cases and it's making it really challenging to meet the debt service coverage payments."
That’s from Sam Chandan of Reis, who knows way more about this stuff than anyone should really want to. He explained to me that originally the fear in the market was that many of these commercial loans would not be able to be refinanced in 2009-2010, when they come due in larger and larger numbers. But that’s not the chief concern anymore. The big concern is risk, which we’re now seeing from the ratings agencies.
The question is: is all this new risk based on real fundamentals? I spoke with Jamie Woodwell from the Mortgage Bankers Association, and he said that while wider economic factors are certainly weighing on the commercial real estate market:
"You've had this disconnect in the CMBS market between the performance of the bonds on the one hand and the pricing of them and that's continued and as we see some negative headlines, that exacerbates that. There are some fears that some investors will end up either wanting or needing to sell their securities, that will put downward pressure on those prices, again even though the performance of many of those bonds are still extremely strong."
So now I’m back to the fear thing. Just to give you an idea, yesterday MetLife , which has sizeable commercial real estate holdings, felt it necessary to issue a release assuring the wider marketplace that those holdings were pretty much safe and sound. The company detailed its CMBS holdings, 95 percent of which is AAA/AA. Of its $35.9 billion commercial mortgage portfolio, “delinquent mortgages amounted to less than $2 million. Yup, that’s an M, not a B.