May 18, 2020 - Economy

Commercial mortgage-backed securities trouble could reprise 2007 meltdown

Houses made out of money

Illustration: Aïda Amer/Axios

Major banks including Wells Fargo, Deutsche Bank and others have engaged in a pattern of fraud in commercial mortgage-backed securities that is putting the whole market at risk, according to a whistleblower complaint submitted to the SEC, ProPublica reported Friday.

Why it matters: That report was published on the same day as the Fed's financial stability report, which warned the commercial real estate market could be among the hardest-hit industries from the coronavirus pandemic.

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

What they're saying: The Fed cited commercial real estate as being particularly susceptible to a major decline in asset prices because “prices were high relative to fundamentals before the pandemic,” and COVID-19 has caused major disruptions in the hospitality and retail industries, "putting the ability of these sectors to make timely mortgage and rental payments into question."

  • Those prices were artificially inflated by the banks, ProPublica reports, citing the SEC complaint, with lenders and securities issuers regularly marking up financial data for commercial properties by as much as 30% “without justification.”
  • The changes "make the properties appear more valuable, and borrowers more creditworthy, than they actually are."
  • "As a result, it alleges, borrowers have qualified for commercial loans they normally would not have, with the investors who bought securities birthed from those loans none the wiser."

Go deeper: Coronavirus is upending the U.S. mortgage market

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