Is Commercial Real Estate Over-Leveraged?

MoodysMoody’s tends to think so.  In a recent article on National Real Estate Investor, Bendix Anderson brings us a chilling discovery on the current state of affair of the Commercial Real Estate sector.  The findings are based on Moody’s recent warning regarding the average LTV’s during their recent rating assessment for securitization of conduit loans.

The article notes a large number of standing commercial loans have been originated as conduit loans.  Moody is finding that the current outstanding debt on these loans dangerously exceeds the income from their collateral with a current average ratio of 98% MLTV (Moody’s Loan-To-Value) quickly approaching the 100% by next quarter reporting.  There is a difference on how lenders assess property values and Moody’s methodology.  While both valuations emphasize on the property’s income, Moody goes further into analyzing the historic relationship of income relative to the property price. It means that at 100% MLTV the borrower has no equity left thus shifting all risk to the lender.

Considering most commercial loans mature in 3, 5, or 7 years after origination, the borrower with little or no equity will not only have difficulty refinancing his loan but he may be at risk of losing his property.  He may have always paid his mortgage on time and kept his property fully rented and in good condition, but if and when rates go up prompting property values to decline, he may find lenders closing their doors to those high risk loans with little equity.  For a full description of the article click here.

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