CMBS Market at Risk of Widespread Defaults, But TALF Change May Ease Burden

At least two-thirds of the American CMBS loans maturing in the coming decade could be at risk of default, according to a new report by Deutsche Bank. However, a recent change to the Federal Reserve’s TALF program could act as a safety valve for the market.The numbers get scarier as the Deutsche Bank report states that 80 percent of loans made in 2007 are also unlikely to qualify according to Reuters, which reported on the study. CMBS loans make up only about 20 to 25 percent of the entire commercial real estate market, yet other sources of financing, such as insurance companies and banks, are likely to see similar or worse potential defaults, the report said. The shutdown in lending by banks and the evaporation of the CMBS market has led to the severe difficulty in accessing capital today, David Dubrow, partner in the law firm of Arent Fox L.L.P. in a May 7 CPN report. “There were irresponsible loans made,” Dubrow said, but he also emphasized that despite problems with loan securitization, the government sees it as an essential financing vehicle. Late last week, the Federal Reserve said that the TALF, now $200 billion in size but possibly to balloon a lot larger, will be opened starting next month to CMBS issued in 2009. “The inclusion of CMBS as eligible collateral for TALF loans will help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans, and facilitate the sale of distressed properties,” the Fed noted in a statement. But, according to the Deutsche Bank report, prices of these properties could continue to fall, resulting in values declining 40 to 50 percent from what was loaned. “Given the extreme shortfall in available credit, any program that restarts the securitization of commercial mortgage debt will be extremely helpful to the real estate industry,” stated a Goodwin Procter blog entry this week in response to the recently announced financial stability plan to include support for the purchase of CMBS.  Approximately $50 billion in CMBS will mature in 2009 (fixed rate CMBS totaling $19 billion, floating rate totaling $31 billion). In addition, a recent Mortgage Bankers Association study has indicated that $40 billion in other mortgage-related securitized debt related to the CMBS market (e.g., B-notes and mezzanine loans in CDOs) will also mature in 2009.