Commercial Mortgage Backed Securities Problems May Resume 2007 Collapse

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Major banks including Wells Fargo, Deutsche Bank and others have engaged in a scheme of commercial mortgage-backed securities fraud that endangers the entire market, according to a whistleblower complaint submitted to the SEC, ProPublica reported on Friday.

Why is this important: This report was released on the same day as the Fed’s Financial Stability Report, which warned that the commercial real estate market could be among the industries hardest hit by the coronavirus pandemic.

The big picture: If there were to be a collapse in the CMBS market, it could have a major impact on the real economy, similar to what happened with mortgage-backed securities during the 2008 global financial crisis, ProPublica notes.

What they say : The Fed cited commercial real estate as being particularly sensitive to a significant drop in asset prices because “prices were high relative to fundamentals before the pandemic,” and COVID-19 has caused major disruption in the sectors of the hospitality and retail, “leveraging the ability of these sectors to challenge mortgage and rental payments on a timely basis.”

  • These prices have been artificially inflated by the banks, reports ProPublica, citing the SEC complaint, with lenders and securities issuers routinely marking the financial data of commercial properties by up to 30% “without justification.”
  • The changes “make properties appear more valuable and borrowers more creditworthy than they actually are.”
  • “As a result,” he says, “borrowers have qualified for commercial loans that they normally would not have, investors who bought securities from those loans are no better off.”

Go further: Coronavirus upsets the US mortgage market


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