The decline in US mortgage-backed securities (CMBS) rates exceeded the 2022 rate in 2023. Rating firms cited rising employment, rising credit scores, lower mortgage rates and higher mortgage rates as reasons for this decline.
Non-agency CMBS issuance is still below 68% this year, even after a record second quarter, raising doubts about the return on office and mall loans. Meanwhile, warning signs continue to appear in the US commercial real estate market, and distressed goods 10% in the first quarter, according to the MSCI Real Assets report.
Moody’s CMBS rating for U.S. CMBS reached a two-year low of 252 in March, and 284 of the 759 for this year’s lows that include cash CMBS. So far in 2023, the Bloomberg CMBS Investment Grade Total Return Index has returned 1.6% after falling 11% last year.
Some traders remain concerned that the trade crisis will worsen, with consequences spread to regional banks. About 700 US banks fail to meet Federal Deposit Insurance Corp. guidelines. since 2006 related to mortgage lending and risk management, doubling two years ago. This may result in increased regulatory scrutiny, including the amount of required compensation.
CMBS issues are typically structured as multiple tranches, with investors holding the highest interest rate that is paid first in the event of a default on the underlying loan. Commercial real estate loans with a five-year term may prompt investors to avoid the riskier types of CMBS.
An overhang could be “difficult to bear” as “financial pressures include unemployment, nervous borrowers, rising delinquencies, deep discounting, rising prices and high yields,” writes Tolu Alamutu, a credit analyst at Bloomberg.
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