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Commercial Mortgage Backed Securities Market Growth Potential
Commercial mortgage backed securities, also called CMBS, are pools of loans that have been secured by mortgages on commercial property, such as office buildings apartment buildings, malls, shopping centers, and industrial properties. Even though these are different from residential mortgage backed securities, both markets have gone down significantly since the financial crisis started. The housing market crisis affected the commercial market crisis, even though they are two different things. Because commercial mortgage backed securities are close to rock bottom, there will be plenty of room for growth once the financial crisis ends. These securities have gone down drastically due to the fact that they include different types of risks in the same security. Commercial mortgage backed securities are a package, and they include both low risk AAA rated bonds all the way down to high risk B rated bonds. Due to the financial crisis going on right now, no investors are willing to take the high risks involved in certain areas of commercial mortgage backed securities. The prices of these securities are very low compared to past prices, and can be found at a steal. Most investors are selling right now though, and not buying. This also brings the price down substantially. Because this sector is poised for significant potential growth, it may be a very good investment if the price is low enough.
Sooner or later, the financial crisis in America and all around the world will be over, and when that happens commercial mortgage backed securities will once again be evaluated on their own strengths and weaknesses, and will grow rapidly. That is not to say that there will not be drastic changes that will take place, because it is almost a sure bet that every investment and trading type, including both residential mortgage backed securities and commercial mortgage backed securities, will come under close scrutiny and more regulations in the future. This will help prevent another financial crisis like the current one. One of the problems that has stagnated the current growth and led to the market issues is the fact that many of these securities were poorly or shoddily underwritten. The demand for these investments was so high that many of the rules for the securities were made looser, to meet the high demand. When the housing market went down, it also took other mortgage markets down with it, including the commercial mortgage backed securities.
The agencies which rate both residential mortgage backed securities and commercial mortgage backed securities have also been the object of much criticism for their perceived role in the current financial crisis. This includes Fitch, Standard & Poor, and Moody’s. At issue is the way that these agencies are paid and the way that their business is operated. This means that the rating agencies will be hesitant to rate anything but the most simple and clear underwriting and the most transparent bonds. these agencies are being partially blamed because they are paid by the bond issuers, which does point to some conflict of interest. It is known that these agencies failed to see this crisis coming, even though it was part of their responsibility to rate the bonds according to the risks involved.
Right now mortgage backed securities quotes are very low, because of the problems being experienced by the market. Eventually this area will be ready for a large potential growth, however it will be in a more restrictive format. Rules will be tightened to help protect the financial markets from facing the same difficulties again. If you own a CMBS, you may want to hold on in the hopes that the market will go back up eventually. Right now, these securities are not even being widely traded on the market.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.
|Securities Investment12 Dec 2008|