Tuesday, October 23, 2012

Looser standards threaten lower ranking commercial mortgage backed debt

Showing that the structured finance industry learned nothing from the run-up to the financial crisis, Wall Street and the Rating Agencies are reprising their role in increasing the riskiness of these securities behind the veil of opacity created by the lack of observable event based disclosure.

As reported by Bloomberg,

Investors adding the riskiest portions of newly issued commercial-mortgage bonds should be cautious as underwriting standards slip, according to Bank of America Corp. 
Wall Street banks and rating companies are competing to win business in the $550 billion market for bonds tied to shopping malls, office buildings and hotels as sales rise, leading to looser loan terms for borrowers, Bank of America Merrill Lynch analysts said in an Oct. 21 report. 
“Greater competition among originators and rating agencies increases the risks associated with owning these securities,” according to the New York-based analysts led by Alan Todd.
Without observable event based reporting, buyers do not have the current information they need to assess the risk of the bonds.

As a result, buyers are not investing, but rather blindly betting on the value of the securities.
Hedge funds, which typically buy bonds to flip them, dominate the market for the most junior-ranked slices of new commercial-mortgage backed securities offerings, according to Bank of America.
At least hedge funds are in the business of blindly gambling with their investors' money.
The lack of interest from so-called real-money investors, or those that invest for the long-term, makes the debt prone to price swings, the analysts said.
The real-money investors are on strike until their is observable event based disclosure so that they can know what they own.

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