Interest Rate Roundup

Thursday, August 21, 2008

Some interesting news on the CMBS market

For the past several months, this is what you've heard from the financial industry about the scope of the credit crisis:

"It's just subprime mortgages."

Then ...

"No, it's just Alt-A and subprime."

Then ...

"Okay, you're right. Prime doesn't look so hot anymore either. But clearly, it's just residential mortgages.

Then ...

"Those auto loans? Alright. You caught me there too. But that's it. I swear."

But time and again, I have made the point that this credit crunch was never the result of just reckless subprime residential mortgage originations. It's the result of stupid LBO lending ... stupid commercial mortgage lending ... high-risk Alt-A and prime mortgage lending ... risky auto lending ... and so on. While the residential mortgage lenders were the worst offenders, banks and nonbank lenders went overboard extending other forms of credit. Now they're paying the price.

In fact, it's no surprise whatsoever that I'm now reading stories like this one from Bloomberg. It talks about how spreads on commercial mortgage backed securities, or CMBS, are blowing out due to deterioration in the underlying commercial real estate market. An excerpt (with a key quote highlighted by me):

"Yields on commercial real estate securities relative to benchmarks rose to near record highs on concern that Riverton Apartments, a high-rise complex in Manhattan's Harlem neighborhood, will default on a loan.

"AAA rated commercial mortgage-backed bonds widened about 37 basis points to 305.57 basis points more than 10-year swap rates during the week ended yesterday according to data from Bank of America Corp. A basis point is 0.01 percentage point.

"The gap, or spread, jumped after a trustee report showed payments wouldn't be made by Rockpoint Group LLC and Stellar Management in September on a $225 million loan on the 1,230-unit Riverton. The property was refinanced in December 2006 using optimistic assumptions for anticipated income, a practice that became common as prices reached their peak, said Alan Todd, head of commercial-mortgage backed securities research at JPMorgan Chase & Co.

"It is indicative of the type of loans that were allowed to get securitized during this time,'' Todd, who is based in New York, said yesterday in a telephone interview."


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