by Calculated Risk on 8/21/2008 11:12:00 PM

From the NY Times: Some Fear Commercial Property Loans Will Be Next Stage in Downturn

“The fear is the next shoe to drop may be commercial real estate,” said Jeffrey Harte, a banking analyst at Sandler O’Neil. “When consumer credit goes south, commercial will follow.”

At the end of the second quarter, Deutsche Bank held $25.1 billion worth of commercial loans. Morgan Stanley held $22.1 billion and Citigroup had $19.1 billion.

Lehman Brothers, which has the largest exposure to this type of security, is shopping about $40 billion worth of commercial real estate assets, as well as its entire commercial real estate business.

And the biggest concern are the CRE equivalent of stated income loans and Option ARMs. Some loans were made on pro forma income (aka wishful thinking like stated income), and the loans included reserves to pay interest until rents increased (like a negatively amortizing option ARM).

From Bloomberg: Commercial-Mortgage Bond Spreads Soar on Harlem Loan (hat tip Bob_in_MA)

Yields on commercial real estate securities relative to benchmarks rose to near record highs amid concern that Riverton Apartments, a high-rise complex in Manhattan's Harlem neighborhood, will default on a loan.
...
At Riverton, income projections (pro forma) factored in converting rent- stabilized apartments to market rates. ... The borrower burned through a $19 million reserve to cover the shortfall in cash flow that was expected from initially lower rent payments ...

``We expect that additional pro forma loans will likely suffer a fate similar to Riverton Apartments,'' ... Lehman analysts wrote.

Who coodanode.