Collapsing Mortgage Securities. Broken Processes. No Accountability. Sound Familiar? [View all]

Faulty credit ratings were a cause of the 2008 crisis. One whistleblower complaint argues that the same dynamic is happening again.

BY DAVID DAYEN AUGUST 14, 2024

Troubles in the commercial real estate (CRE) markets, which have been predicted for years, appear to be growing. Delinquency rates above 30 days on office building loans ticked up in June, representing close to $2 billion in losses, according to a report from Moody’s. Office vacancies are at a record high of slightly over 20 percent, and this has translated into loan defaults, stretching from the Illinois Center tower in Chicago to a suite of office buildings in Mountain View, California, in the heart of Silicon Valley.

A couple billion in defaults in a market valued around $20 trillion isn’t worth worrying about. But a significant chunk of CRE loans are starting to come due for the first time since the pandemic greatly increased working from home. Prices on commercial properties began dropping last spring for the first time since 2011, and regional and local banks, which are more exposed to these loans, are in a particularly precarious position. Regulators are even starting to talk about fraud and questionable valuations in these markets.

Experts have described CRE as “a train wreck waiting to happen.” But Moody’s is a company that’s supposed to have seen the train wreck coming. It is a credit rating agency, which assesses risks in bonds and securities and assigns a rating that reflects those risks. If losses in bonds backed by CRE were inevitable, the credit rating agencies should have built that into their models rather than assigning them super-safe ratings.

Now, however, we’re seeing large downgrades in commercial mortgage-backed securities (CMBS), the debt instruments that are tied to CRE loans. Those downgrades are at the highest in “recent memory,” analysts at Bank of America said last year, with 40 deals affected.
https://prospect.org/economy/2024-08-14-collapsing-mortgage-securities-broken-processes/