Imagine you make money when other people screw up. Then, suddenly, they get their acts together. Could be a problem.
That’s what some owners of commercial mortgage-backed securities are finding out.
It goes like this. Someone buys a commercial property and pays a mortgage on it. That mortgage is resold as a CMBS. Investors buy CMBSs because they make money either A) on the interest paid on the mortgage, or B) by selling that CMBS to someone else, just like you might buy and sell stock in a company.
At one point, commercial mortgages typically carried a high rate, so CMBSs were good investments and easy to sell — although the issue of delinquencies was certainly there. Still, investors snapped them up.
But now, mortgage holders — commercial-property owners — are refinancing at lower rates, just like so many other folks. In other cases they’re able to sell the property thanks to a recovering market.
Either way, it’s not good for the holders of those CMBSs. Either they’re making less money (thanks to a borrower who refinances), or they’re getting paid off (thanks to the property selling).
So what? you say, it’s not like they’re losing money — they just aren’t making as much as they used to.
That would be true if they planned to hold onto the CMBSs. But if they were hoping to sell them — just as you might sell a stock when it went up in value — well, that ain’t happening.
And that can affect commercial lenders, who like to package their loans into these CMBSs and sell them. Buyers are harder to come by. So maybe credit gets a little tighter… you get the picture.
Anyway, file that under “Hmm… interesting.” Or read the details from the Wall Street Journal article.