Commercial Lending on the skids …
By: Myles, February 19th, 2008
In an eye-opening article in the Wall Street Jornal today, the New York financial establishment is bracing for yet another hit of multibillion-dollar losses.
Apparently, the crisis that began with sub-prime mortgages is spreading like wildfire to other markets, as well:
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High-risk loans used to finance corporate buyouts have plummeted in value.
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Securities backed by commercial real estate mortgages have taken a nose dive.
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Student Loans have fallen sharply.
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Auction-rate securities, arcane investments usually considered as safe as cash, have stumbled.
And there’s even more pain in store for major banks in the days to come, which have already written off more than $120 billion of losses stemming from bad mortgage-related investments. And here’s why it really matters to us, the commercial real estate community. The deepening losses might make banks even more reluctant to make the loans. An additional $20 billion in losses this year is possible on commercial mortgage-backed securities and other debt instruments tied to commercial mortgages, according to Goldman Sachs, which predicts commercial property prices will decline by as much as 26 percent.
There has also been a marked deterioration in the market for commercial mortgage-backed securities, which are commercial mortgages packaged into bonds.
Accordingly, the cost of insuring a basket of commercial mortgage-backed securities has gone up five-fold. Last October, for example, it cost $39,000 to insure a $10 million basket of top rated 2007 commercial mortgages (super senior AAA, in Wall Street language) against default. Today that price has increased to $214,000. For triple-B-rated commercial mortgage backed securities, those which are riskier, the cost of protection during the same time has soared from $672,000 to $1.5 million. Goldman Sachs predicts commercial real estate loan losses to total $180 billion, with banks and brokers bearing $80 billion of that in total and about $20 billion this year. Lehman Brothers has the highest exposure to commercial real estate-backed securities, with $39.5 billion, followed by Morgan Stanley, with $31.5 billion. (These numbers do not include hedges that the banks may have but do not disclose).
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