Just as the economy is showing hopeful signs of life and the federal government is turning a profit on the early bailout money, the country may get blitzed by a second round of foreclosures — this time on commercial property instead of homes.
The Wall Street Journal reports that a large and still-undetermined chunk of $700 billion in commercial mortgage-backed securities, CMBS, is in trouble thanks to a massive downturn in the commercial real-estate market.
Like the mortgage bonds that caused such havoc when the housing market went south, commercial mortgages are packaged up and sold as bonds. Like homeowners betting that the value of their house would keep going up, investors in CMBS bet that the occupancy, rents and underlying value of commercial real estate — hotels, malls, office buildings, etc. — would keep rising.
The Journal cites figures saying that of $153 billion in CMBS loans coming due by the end of 2012, $100 billion will face difficulty getting refinanced. The result could be a freeze in a major credit market and, without refinancing, a wave of foreclosures that will only further depress property values.
The companies that service CMBS apparently have even less latitude to unravel the bonds and renegotiate the loans than the banks did with home-mortgage-backed securities. The result is that even sound properties could be thrown into default. The Journey commissioned a study of 281 CMBS, worth $6.3 billion, that were unable to refinance when they came due in the past three months. But the Journal said that 173 of those loans, worth $5.1 billion, were generating more than enough cash to service the debt.
Federal Reserve and Treasury officials are working to head off a crisis in commercial real estate. Regulators can plausibly argue that they were blindsided by the size and speed of the crash in home prices. No one can say we didn’t see this one coming.