Danger Ahead for Investors in Commercial Mortgage-Backed Securities
Recent reports indicate that serious problems lie ahead for investors in approximately $700 billion in commercial mortgage-backed securities. The securities are complex structured finance instruments that are constructed with bundles loans secured by apartments, shopping centers, office complexes or hotels, among other commercial real estate projects. Unfortunately, many of the mortgages were underwritten using loose underwriting standards with liberal financing structures in much the same way that subprime mortgage loans were underwritten. For example, many of these commercial loans made between 2005 and 2007 were either interest-only loans or partial interest-only loans and are facing payment resets that the borrowers can’t afford.
Now, it appears that the gig is up for many of the loans underlying these complex securities. Principal is coming due and the payments on many loans are scheduled to jump significantly (in many cases 20% or more) just as the economy is being hit with falling rents, less demand, and soaring vacancies. RBS Securities reported that the delinquencies on securitized commercial mortgages is at the highest level ever. Late payments are currently running 2.77% up from .47% at the end of 2007. Moreover, the prices on even top rated senior debt have dropped to less than 70 cents on the dollar. A year ago such securities were trading at 95 cents on the dollar.
All of this is happening in an extremely bad time for investors. Virtually every type of collateral backing these commercial mortgage-backed securities is losing value. Hotels continue to suffer as fewer people are traveling and businesses are cutting back on travel allowances. Shopping centers and retail complexes are suffering as more and more retailers are going out of business and restaurants experience tough times. According to recent statistics, office vacancies in the United States are currently running at approximately 15.5%, vacancies are expected to climb higher as more firms shut their doors or pare back operations and rents are dropping.
All of these factors suggest that there is a significant risk that commercial mortgage-backed securities investors are facing a scenerio similar to that which decimated residential mortgage-backed securities over the past two and one-half years.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing investors regarding their securities problems. For further information, please contact us.
