Commercial real estate lending is booming again. But this time around something is different: When bankers make commercial loans now, they bundle the expected repayments together and sell them as securities, eliminating from their books the risk of default.
Now some analysts are wondering if the overburdened ratings agencies are up to assessing the risk of the exploding voumes of such commercial mortgage-backed securities, or CMBS. Over $40 billion in new loans have been securitized and sold already this year, as much as in all of last year. The total volume of CMBS issues in circulation has grown over the past six years to more than $160 billion, bigger than the total equity-market value of all real estate investment trusts. Another $40 billion is expected this year, making the CMBS market the fastest growing source of capital fueling the real-estate boom.
“Buying CMBS is like buying fine wine — you have to differentiate the vintage year,” said Steven Wolgin, a former vice president at Standard & Poor’s Ratings Group who is now a principal in investment company Odyssey Associates and a professor at Columbia University’s business school. “You want to have bought in 1993, 1994 and 1995 because the loan-to-value ratios were low, the debt-service coverage was high, and the underwriting scrutiny was intense. Now the vintage years are gone and there is so much competition to make loans that the underwriting is razor-thin. We may look back to 1998 and say that the market didn’t adequately reflect the risk.”