http://www.zerohedge.com/news/2016-07-05/time-take-feds-warning-seriously-cmbs-has-greatest-ever-monthly-delinquency-increase
commercial real estate has a host of terms that appear designed to make payment defaults, reduction in property values, and bankruptcy an alluring part of capital markets
the commercial mortgage backed security market is a caste system of principal, interest, and pain allocation handicapped for risk
the senior, ostensibly secured, tranche (note the use of fancy French terms), has priority on payments for the pool
(a digression, many mortgages are placed in a pool, principal and interest payments are carved up so in the event of non payments the money that does come in goes to the senior tranches first (for which the return is the least) and is taken from the subordinate tranches (for which the return and risk is the greatest as reflected by the discounted price of entry)
the terms : specially serviced, appraisal reductions, watch list, defeasance, are all symptoms of defaults, reduced property values, and bankruptcies spreading through the waterfall of the payment structure
not good for the cmbs longs, good for the cmbs shorts, and really not clear what the impact will be on the massive cmbs derivative jockeys until their mark to models implode
herewith the elevated thinking of listed funds holding illiquid assets suspending redemptions
commercial real estate has a host of terms that appear designed to make payment defaults, reduction in property values, and bankruptcy an alluring part of capital markets
the commercial mortgage backed security market is a caste system of principal, interest, and pain allocation handicapped for risk
the senior, ostensibly secured, tranche (note the use of fancy French terms), has priority on payments for the pool
(a digression, many mortgages are placed in a pool, principal and interest payments are carved up so in the event of non payments the money that does come in goes to the senior tranches first (for which the return is the least) and is taken from the subordinate tranches (for which the return and risk is the greatest as reflected by the discounted price of entry)
the terms : specially serviced, appraisal reductions, watch list, defeasance, are all symptoms of defaults, reduced property values, and bankruptcies spreading through the waterfall of the payment structure
not good for the cmbs longs, good for the cmbs shorts, and really not clear what the impact will be on the massive cmbs derivative jockeys until their mark to models implode
herewith the elevated thinking of listed funds holding illiquid assets suspending redemptions
With three UK-based property funds, among them Standard Life, Aviva and M&G, all "freezing" assets in the past 2 days and suspending redemptions over fears of a swoon in UK housing prices, spreading panic shockwaves around the globe that the Brexit dominoes have come home to roost (to mix and match metaphors), it may not be a bad time time to jump across the Atlantic and look at US real-estate and in particular, commercial properties. As CMBS specialist Trepp wrote today in its weekly TreppWire commentary, the "Trepp CMBS delinquency rate moved noticeably higher in June, as the rate was pushed up by loans that reached their maturity date but were not paid off." It was the fourth straight month that the rate has crept higher following two large decreases in January and February. The delinquency rate for US commercial real estate loans in CMBS is now 4.60%, an increase of 25 basis points from April.
This is in line with recent warnings from the Fed which just two weeks ago cautioned not only about another stock bubble when on June 21 it said that "forward price-to-earnings ratios for equities have increased to a level well above their median of the past three decades" but again warned that commercial real estate remains the most troubled sector: "valuation pressures have remained notable in the commercial real estate sector, to which some small banks have substantial exposures." This includes not just bricks and mortar malls, which are losing bankrupt retail tenants by the hour, but also the collapse in the shale sector. It also includes a sudden spike in vacant office space.
Comments