So much for the idea that it was only residential real-estate that was in trouble:
BreakingViews: For the top-rated slices of C.M.B.S. [Commercial mortgage-backed securities], risk premiums have ballooned this week. The spread on some triple-A securities, which widens when they fall in value, increased by two percentage points Wednesday alone.
Now, they’re trading with yields around 13 per cent, knocking them down to the same category as junk bonds, despite their top rating. Barclays‘s investment-grade C.M.B.S. index has fallen about 20 per cent over all this month, the sharpest decline ever.
The acceleration of this collapse over the past couple of days is partly due to the widely publicized potential default of two loans that are held in many C.M.B.S. portfolios. One backs luxury hotels and the other a mall in California. But the recent downdraft is too severe to be attributable to that news alone.
Rather, the C.M.B.S. slide gained steam after the Treasury secretary, Henry M. Paulson Jr., said last week that the “troubled asset relief program” wouldn’t buy dodgy mortgage securities off banks’ balance sheets.
Before then, investors bearish about the commercial real estate sector didn’t want to bet against C.M.B.S. for fear the government might swoop in and buy the securities at inflated prices. But when that possibility dimmed, it increased expectations that value of C.M.B.S.’s would decline.
Some investors believe the value of C.M.B.S. has fallen farther than the fundamentals of the underlying property market warrant, especially since many C.M.B.S. are insured or have extra collateral. [It’s different this time.] That could be valid, although it sounds a lot like the arguments made a couple of years ago by residential-mortgage-security enthusiasts, who were proven wrong.
Commercial mortgages have not yet defaulted on the scale of their residential counterparts. Those who pay mortgages on offices, hotels and retail shopping properties usually have deeper pockets than the average homeowner, and often don’t run short of cash until after tenants stop paying rent. But with unemployment spiking and consumer spending down, any cushion they may have is getting thinner. C.M.B.S. investors are paying the price for now. But if the erosion in the market continues, so will the rest of the financial system.
We shudder to ask, but how big is the CMBS market?
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