Commercial Mortgage-Backed Securities (financial instruments backed by debt derived from commercial real estate mortgages) are in growing trouble, says the Wall Street Journal:

“The CMBS sector is suffering two kinds of pain, which, according to credit rater Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level a year earlier. One is simply the result of bad underwriting. In the era of looser credit, Wall Street’s CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren’t generating enough cash to make principal and interest payments.

The other kind of hurt is coming from the inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Even though the cash flows of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won’t be able to extend existing mortgages or replace them with new debt. That means losses not only to the property owners but also to those who bought CMBS — including hedge funds, pension funds, mutual funds and other financial institutions — thus exacerbating the economic downturn...”

My Comment

So there you have the reality under the green shoots hype. The economy might be showing good signs – why wouldn’t it, the amount of money that’s been thrown into it – but in the long-run, the refusal to let the underlying problem correct itself only drags out the crisis and makes it worse. And that’s just CMBS, one part of the entire commercial real estate market. The whole market is $6.7 trillion.

The failing loans make up about 1/60th of the entire market, but since they’re widely dispersed in individual and institutional portfolios, their impact will be far greater and more cumulative than their numbers would suggest. That was what happened with residential ARMs.

We explain the whole crisis in “Mobs, Messiahs, and Markets” (check out the new paper-back edition that came out from John Wiley, August 24, 2009) – look at the financial sections – “Flattening the Globe” (that explains the un-Friedmanesque facts behind globalization) and the section called “Bubble Kings.”

It’s a quick and easy but thoroughly researched run-down of what happened in the financial markets. You’ll be able to figure it out, even if you never took a course in economics.

In fact, it might be harder for you if you did take college economics, where the underlying premise is that static models can do better than real world analysis in predicting what’s going to happen.

How many of these academic experts, including Ben Bernanke, anticipated what might happen and explained clearly and accurately why it would happen? None, it looks like.

There’s a lot of revisionism going on now..People are rewriting what they said two years ago or five, or even farther back. But the truth is, the emperor (expert opinion) has been caught out wearing a g-string. And nothing much else.

The experts are buck (excuse the term) naked….