Moody's warns of risk in CMBS By Richard Beales in New York
Mon Aug 8, 3:55 PM ET
Investors in structured products backed by commercial property debt may be at risk from the "frothy" lending climate, according to a recent report by Moody's Investors Service, the credit rating agency.
Some investors in commercial mortgage backed securities, or CMBS, are relying partly on the strong track record of the asset class - a record established during a period of rising property prices and falling interest rates, according to Tad Philipp, one of the authors of the report.
By Moody's analysis, the typical loan destined for inclusion in CMBS instruments now exceeds the sustainable value of the property on which it is secured - although the market value might be higher.
"Loans are originated to sell rather than hold," said Moody's. The institutions that make such loans often repackage them into CMBS, which are sold to capital market investors.
The US market for CMBS was $72bn in the first half of this year, 65 per cent up on the same period last year, according to the agency.
CMBS investors, however, have longer-term exposure. Mr Philipp asked: "How much do you want to rely on the hot market conditions of today prevailing in five years' time?"
Some similar concerns apply to related products including collateralised debt obligations, or CDOs. Issuance of these packages of CMBS and other property-related debt totalled $9.2bn in the first half of this year, according to Moody's.
CDOs increasingly allow underlying assets to be bought and sold. "That makes [investors] more dependent on rating agencies monitoring the deal," said Mr Philipp. |
