CMBS Faces Risk of ‘Disruptive Shocks’ Regulators Told

Commercial mortgage-backed securities have more risk than last year as landlords need to repay maturing debt and vacancies remain elevated, according to an analysis prepared for insurance regulators.

“Downside risk for CMBS relative to last year’s assumptions has clearly increased,” according to a report for the National Association of Insurance Commissioners posted on the group’s website. The market is “proving itself subject to highly disruptive shocks” and has less time to deal with the coming wave of loan maturities, consultants and NAIC staff said in the report.

Regulators are scrutinizing bonds held by insurers as they evaluate whether the companies will have enough funds for policyholder obligations in an economic slump. The report, dated Oct. 16, was sent to Kevin Fry, chairman of the NAIC’s task force for valuation of securities. State regulators can demand insurers hold more funds against assets deemed risky.

The outlook is too negative and doesn’t reflect market improvements, the American Council of Life Insurers said in a letter on the NAIC’s website. The ACLI is an industry group which represents firms including MetLife Inc. and Prudential Financial Inc.

“We believe the current state of the market is the healthiest it has been since 2005,” Michael Monahan, senior director for accounting policy at the ACLI wrote. Proposed changes in models for CMBS and residential mortgage-backed securities “will result in an unwarranted increase in capital charges for the vast majority of securities.”

Building Values

Investors have snapped up commercial and residential property debt this year as the real estate market has shown signs of improvement and the Federal Reserve pushed down borrowing costs, fueling demand for higher-yielding bonds.

The extra yield investors demand to own top-ranked CMBS rather than Treasuries has fallen to 1.07 percentage points from 2.47 percentage points on Jan. 3 and is down from the peak of 15.07 percentage points in November 2008, according to the Barclays CMBS Aaa Super Duper index. That’s the lowest since at least January 2008.

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