Commercial
At the end of 2006, there were $769.6 billion in commercial mortgage-backed securities, according to Moody’s. This represented 26.1% of all outstanding commercial mortgages. Bond rating agencies, nervous from the subprime fallout, have begun to crackdown on what they consider to be risky lending practices in commercial real estate.
Commercial mortgages, like their residential counterpart, are gathered up and packaged into bonds that are divided into portions assigned different degrees of risk. Bond rating agencies have grown increasingly concerned about the level of risk and have for the first time announced that they will adjust their ratings to reflect that level of increased risk.
While default rates for commercial loans have remained historically low, many are concerned that will soon change given the fact that many commercial mortgages are being written as interest-only for the first 10 years, with huge balloon payments at the end of the term. Furthermore, bond agencies are concerned that lenders are not requiring landlords to set aside adequate reserves to cover taxes, insurance and other costs if things go wrong. With this in mind, Fitch Ratings is now predicting a 15% increase in defaults of loans that are being written now.