Commercial-mortgage bond risk rises after loan delinquencies

November 19, 2008 by · Leave a Comment
Filed under: Real Estate News 

Looks like the next shoe to drop will be the commercial real estate market.  It has lagged behind the residential market but it is not immune by any stretch.  Looks like you need 700 basis points (7%) to get debt insurance (CDS) on a CMBS (Commercial Mortgage Backed Security).  

Just today, the premium rose, 1.3%.   With businesses either shutting down or cutting back on their expenses, this will have a direct effect on the commercial real estate market.   If you have been following the CoStar newsletter that tracks the commercial market, they have not had a rosie picture for our current real estate market either.  Time to batten down the hatches.


The cost to protect top-rated commercial-mortgage bonds against default rose to a record, a day after two bad loans boosted concern the debt will cause losses.

The cost of default swaps on AAA rated bonds rose 130 basis points to 700 basis points based on Markit CMBX index contracts as of 11:55 a.m. in New York, according to a note to clients from Goldman Sachs Group Inc.

A decline in commercial-mortgage-bond prices accelerated yesterday following a Credit Suisse Group AG report indicating two property owners with $334 million of loans bundled into bonds are about to default. Prices dropped last week when Treasury Secretary Henry Paulson said the U.S. no longer plans to make asset purchases a focus of a $700 billion rescue program.

The “collapse in prices currently underway” among commercial mortgage bonds means that more of the $250 billion of capital being injected into U.S. banks as part of the program will go toward allowing financial companies to rebuild reserves as they write down or sell troubled assets, Jeffrey Rosenberg, the New York-based head of credit strategy research at Bank of America Corp., wrote in a report yesterday.

Yields on the safest types of AAA rated commercial-mortgage bonds yesterday rose a record 264 basis points to a record 1,118 basis points more than benchmark swap rates, according to Bank of America data. A basis point is 0.01 percentage point.     

Source: Bloomberg

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