CMBS, Lenders, Foreclosure and You

Wells Fargo sues owners of Riverton Apartments, a 1,230-unit complex in Manhattan’s Harlem neighborhood, because the owners have not made payments since October.

Wells Fargo is acting on behalf of investors who bought CMBS in which the property is included.

From the article:

The loan is serving as an indicator of how mortgage holders will handle delinquencies on commercial real estate that’s “underwater,” meaning the property value has fallen so much that it’s worth less than the outstanding loan. If Riverton is sold in a foreclosure, it will also help investors estimate the market price of similar properties.

“Market participants want a gauge of recovery value for CMBS bondholders on other multifamily loans predicated on performance projections that now appear untenable,” said Andy Day, a commercial mortgage-backed securities analyst at Morgan Stanley in New York.

This may prove to be a test case for how this whole CMBS system will unwind. CMBS may prove to be to commercial real estate what sub-prime loans were for residential properties. The concept is similar, in that many loans (mortgages) are packaged into one security with pieces bought and sold.

What happens when the whole system collapses because the underlying security is worth less then the loan has been a huge question that needs to be answered before the market can hope to recover.