Just as the economy starts to recover, a second mortgage disaster may be looming. The commercial real estate sector is tanking, with many properties unable to generate enough cash to make mortgage payments. Lo and behold, those commercial mortgages have been sewn into securities—comparable to the packages of home mortgages that set of the financial crisis last year—in a $700 billion market where delinquency rates are skyrocketing.
As the Wall Street Journal reports, a commercial mortgage-backed security combines debt on several dozen properties, with big banks like Wachovia and Wells Fargo brokering transactions between borrowers and investors. Banks have so far been able to keep losses down by extending debt to borrowers, so long as the properties are bringing in a bit of cash. But barring a substantial uptick in hiring and shopping, commercial real estate is in trouble—and banks could be, too.