Wall Street is Back Up to its Old Tricks – Sales of Risky Asset Backed Securities Return


The asset-backed securities market ? “the Wall Street credit machine that helped set off the financial crisis” ? has come back to life, according to a New York Times article called “Wall Street Securitization Machine Back Into Gear?” Securities backed by commercial real estate, which apparently did not reach expected lows, are leading the pack. Bankers are calling the resurgence C.M.B.S. 2.0, referring to new versions of commercial mortgage-backed securities. But securities backed by bundles of car loans and collateralized loan obligations are also on the upswing.

So far this year, big banks have packaged and sold about $5 billion of new securities backed by commercial mortgage loans, almost the total of all such deals in 2010. According to the article, Morgan Stanley and Bank of America recently completed a $1.55 billion commercial mortgage-backed securities deal involving office and retail properties. JP Morgan Chase is reportedly selling a $1.5 billion commercial mortgage-backed security. Similarly, RBS recently sold a $1.3 billion commercial mortgage-backed security in conjunction with Wells Fargo & Company, according to the article.

The total volume of securitization reached $2.5 trillion in 2007, of which $230 billion consisted of commercial mortgage bonds. The market collapsed in 2008 as the underlying loans were revealed to be bad.

Although residential real estate values continue to lag, prices of commercial properties are stabilizing, according to the article (citing Moody’s/Real Commercial Property Index), and this is aiding the sales of C.M.B.S. 2.0.

If activity continues at its present pace, sales of mortgage-backed securities could reach the $45 billion mark this year, according to the article (citing JPMorgan).
“Things have gone vicious to virtuous,” Brian Lancaster, a securitization specialist at the Royal Bank of Scotland, was quoted as saying.

Standard & Poor’s, however, warns that the new deals are more complex and underwriting standards are still not what they should be. “We have seen some examples where appraisals/valuations look quite aggressive to us, especially given the downward property price movements over the past few years,” the agency was quoted as saying in a recent report titled “15 months Later’ The Caution Flag is Out for C.M.B.S. 2.0.”

Page Perry has over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.