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Ratings Company Predicts Record Losses in Commercial Mortgage-Backed Securities

June 7, 2010

As Riverside commercial real estate loan modification attorneys, we've been following the news about commercial mortgage-backed securities for the same reasons we follow news about unsecuritized commercial loans. Unfortunately, that news continues to be grim. According to a June 2 article from the Wall Street Journal, financial ratings company Fitch released a study that day showing that investors in CMBS lost an average of 57% of their principal in 2009 in mortgages that were foreclosed on or sold. That's much higher than the historical average of 37%, the newspaper said. Worse, Fitch's study predicts that this rate will exceed the historical average throughout this year and into next year, creating severe losses for investors.

The problems with CMBS are the same as the problems with the commercial real estate market generally, the article said. With the economy struggling, many tenants are giving up their office space or negotiating breaks on rent. That means property owners are having problems finding tenants at all, retaining them and charging enough rent to cover costs. At the same time, buildings are losing their value because all real estate is losing its value. This leaves some building owners underwater on their loans, which means they can't refinance when the loan comes due -- or when they find that they don't have enough income to pay off the loan in the first place. All of these factors contributed to a delinquency rate of about 8.4% in June, the article said -- more than triple the rate from a year earlier. And that creates the very high loss severity rate projected by Fitch for CMBS this year and next year.

Our Los Angeles County commercial real estate loan modification lawyers are not pleased, but also not surprised. We have watched commercial real estate throughout the year. Ratings agencies -- and real-life data -- have consistently shown heavy losses in CRE, for all the same reasons discussed above. It's not surprising that this would eventually affect the investments of securitized CRE, just as the subprime mortgage crisis in the residential housing market has affected investments in securitized mortgages. The question is, what will lenders do about this? Residential mortgage lenders have not been enthusiastic about helping struggling borrowers reach a loan modification, and many have, correctly or otherwise, blamed securitization for blocking the way. If lenders have similar problems modifying securitized CRE loans, however, they run the risk of major losses that could bring down a small to mid-sized bank.

If you're a commercial real estate investor facing problems like these, you should consider calling Howard Law PC. We are an established bankruptcy law firm with substantial experience helping victims of the mortgage crisis get modifications to their loans. Now, as more and more commercial real estate companies are facing similar problems, our Irvine commercial real estate loan modification attorneys are using those same skills in the commercial arena. We have substantial experience negotiating with lenders to reach a fair and sustainable deal, even when the lender has not shown openness to negotiation directly with the borrower. Lenders understand that when an attorney calls, a lawsuit may soon follow -- and that means they pay attention when they hear from us.

Howard Law offers free, confidential consultations, so you risk nothing by speaking to us about your legal options. To set one up, please contact us online or call toll-free at 1-800-872-5925.