“CMBS Market Begins to Show Fissures”

The following is an excerpt from the Wall Street Journal – WSJ (11-19-08):

The market for debt used to finance hotels, offices and shopping malls tumbled Tuesday on worries that the long-feared rise in defaults for commercial mortgage-backed securities had begun, possibly ushering in the next phase of the financial crisis.

According to a Citigroup Inc. report, the overall number of commercial mortgages packaged into securities that are 30 days or more past due rose to 0.64% in October from 0.39% at the end of last year, with most of the increase coming in October. The latest figure, though low by historic standards, marked the highest delinquency rate in two years.

The jump in soured commercial loans was mainly due to the financing drought and a lack of buyers. Property owners have been unable to refinance mortgages as they have become due, forcing defaults if existing lenders have been unwilling to extend loans under the same terms.
(You can read the full WSJ article here: CMBS Market Begins to Show Fissures – WSJ.com.)

Despite the dire headlines I can tell you that nobody in the industry is surprised by this.  The commercial mortgage market has lagged the devastation of the residential market but a downturn was inevitable.  Most commercial mortgages come due in 5 to 7 years, so all the commercial mortgages originated during the meteoric rise in real estate prices are starting to come due just as economic pressures come to bear and available financing disappears like the dinosaurs.

What the article just glosses over though is that delinquency rates are still at all time historic lows. Over-leveraged property owners with little equity are more likely to default, but those that have something to lose are not so willing to hand the keys back to the bank.  Solution?

Enter the Commercial Private Mortgage Lender.  Private lenders are not subject to the whims of the public debt markets and do not make their money by selling the paper to someone else. (The key implication of that last point is that we do not make stupid loans on the basis that we can offload the risk onto some other unsuspecting investors.)  A quick assessment of the property’s potential and it’s protective equity can be just the lifeline troubled property owners need.  The money is expensive; much more expensive than a conventional bank loan, but it’s far less than an equity partner. Private money is not the solution for everybody but it can save your property, and your financial life – and fortune. Risk is appropriately accounted for and everybody wins: borrower gets a low friction loan and the trust deed investors get a great return on their money.