‘Genius’ fails again: this time it’s subprime commercial loans

As I was explaining here this week in Real estate investment products: another ‘big short?’, thanks to capital and fund managers desperate for yield the past 5 years, along with underwriters paid to package loans into securities and sell them off like hot cakes, commercial real estate prices have doubled since 2010.  Yep doubled.

Then something inconceivable to confident participants happened.  In January commercial property prices fell nationally for the first time in seven years, according to the Moody/RCA Commercial Property Price Index.  That’s just the beginning.  See Real estate’s ticking time bomb: who gets hurt:

Commercial real estate, which includes apartments, shopping malls, offices and warehouses, are backed by nearly $3 trillion in mortgages, according to the Mortgage Bankers Association (MBA). The lenders include big banks, which are the largest, insurance companies and commercial mortgage backed securities (CMBS), which are bonds sold to investors. That last one is where the problem lies. It is the second-largest source of commercial real estate debt, and during the last boom, back in 2005, CMBS was very popular.

CMBS tends to have a 10-year life span, at which point the debt matures and real estate owners have to refinance the loans. These maturities are expected to surpass $400 billion annually this year and in 2017, according to CBRE, a real estate services firm. That is $100 billion more than last year. CBRE “conservatively” estimates that 18 percent of loans this year and 29 percent of loans next year could have problems refinancing, due to lack of investor demand for the bonds.  This translates into about $43 billion in potentially troubled loans over these two years.

“We think some of these are going to be remonetized through asset sales, but some will certainly hit the foreclosure list and end up on the special services list of loans to be worked out,” said Brian Stoffers, who oversees the debt and structured finance practice at CBRE.

Sound familiar?  The big refinancing needs begin to hit June 2016….Stay tuned.

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