Jesse's CMBS

Jesse talked to the class about capital markets as they relate to real estate, and a view of what happened when the market crashed in 2008. 

Prior to 2008, there was a boom in sub-prime lending partly because of the euphoric thought that "real estate values will never go down".  Also, many builders participated in sub-prime lending which had a perhaps unplanned effect of artificially driving up property values faster than the market would have.  These mortgages were packaged into Commercial Mortgage Backed Securities in order to monetize the revenue streams, and these CMBS' were purchased by governments and other large investors.  The crisis happened when borrowers started defaulting on their mortgages in greater and greater numbers, and the market realized that the CMBS tranches were rated as much less risky than they actually were. 

After the crisis, there was a 'back to basics mentality' with lenders who have become extremely risk-averse. 

Since the markets have settled, there has been a flood of money back into real estate, and lenders have begun easing requirements.  This is causing another rise in property values, a reduction in Cap Rates, and heavy investment.  The issue is that loans are maturing at record rates between now and 2017.  Cap Rates are sure to rise as the Federal Reserve Bank seeks to begin increasing interest rates.  The risk now is if rates rise, property valuation will drop, leaving borrowers potentially unable to meet their LTV ratios and therefore unable to refinance their properties.  This could lead to another market correction, especially in the CMBS market.