The One Shoe That Didn’t Drop in The Financial Collapse- Commercial Mortgage-Backed Securities. #CRE

Heidi N. Moore was talking with a investor who specializes in buying distressed commercial mortgage-backed securities (CMBS) and I was reminded of something Warren Buffett said back in 2007:

“When people start dropping shoes you really don’t know whether they’re a one-legged guy or a centipede.”

The investor was saying that the commercial real estate (CRE) market has been under the same pressure as the housing market but the CRE market hasn’t crashed. Why hasn’t that shoe dropped… and why won’t it?

Banks avoided writing down commercial mortgages by renegotiating with their borrowers

The investor said that CRE was “rife with all the same corruption as the housing market: banks didn’t do their homework before signing loans, ratings agencies were overly generous in classifying weak loans as strong, but when it came [time] to mark down the value of the struggling commercial real-estate loans, many banks simply refused. They inflated the values of the loans to make their balance sheets look good.” [And therefore could keep all their bailout funds at work speculating in derivatives and jacking their bonuses instead of being set aside to cover losses.]

There are two other reasons that the CRE market and the CMBS tied to it didn’t crash: 0% interest rates, which means commercial borrowers weren’t punished with higher interest payments; and more importantly Wall Street banks and commercial real-estate investors worked together to renegotiate better deals to avoid defaults.

Heidi was trying to pitch it as a Wall St. and their cronies vs the little guy thing and the investor’s complaints sounded a bit like sour grapes but I think it proves one very important thing: If you owe the bank a little they’ve got you; but if you owe the bank a lot you’ve got them. This is one of the advantages of CRE investment over residential.

Not that I disagree with the investor, I was salivating over the possibilities of a RTC 2.0 fire sale of apartment buildings but it was not to be. Instead we have to make a living the old fashioned way, by digging in the weeds to find undervalued properties that can be turned into good apartment building investments.

To see Heidi’s whole take on the situation see here. She is also a great follow on Twitter at: @moorehn, not only on the deeds and misdeeds of Wall St. but also a very wry take on life in NYC.

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One thought on “The One Shoe That Didn’t Drop in The Financial Collapse- Commercial Mortgage-Backed Securities. #CRE”

  1. For another view on CMBS investing see this video interview with Keith Hall of KBS Capital from the Commercial Real Estate Distressed Assets Conference last year: http://bit.ly/P3luqI Keith has some very useful insights for commercial real estate investors.

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