Over all, there are $550 billion worth of commercial mortgage-backed securities outstanding in the United States, financing hotels, shopping centers, office buildings and even self-storage facilities.
During the last recession, another class of securitized mortgages — then mostly home loans made to risky borrowers — played a major role in the economic crash, as homes suddenly lost value and homeowners defaulted, saddling investors, banks and other financial institutions with huge losses.
A similar pattern is emerging in the hotel industry, with $20 billion or 23 percent of the securitized debt held by the lodging industry at least 30 days delinquent on payments, according to Trepp, a company that tracks the sector. In the last recession, the total value of delinquent commercial mortgage-backed securities, known as CMBS, peaked at $13.5 billion.
While financial agencies are paying close attention to the commercial real estate market, defaults in CMBS alone are seen as unlikely to cause an economic collapse rivaling what happened when residential mortgage-backed bonds began unraveling in 2008.
In part, that is because the debt is less concentrated and the riskier slices — the ones that absorb the first losses — are generally held outside the banking sector. In 2008, banks’ exposure to securitized residential mortgages brought major lenders to their knees, choking off credit to the real economy and reverberating through the financial system.
But the experience is still creating pain. As the pandemic has dragged on, an increasing number of CMBS borrowers, particularly in the hotel industry, are giving up on paying their debt obligations and preparing to turn their properties over to lenders, according to Trepp, which as of August had counted at least 35 such loans worth a total of $1.6 billion.
In some particularly hard-hit markets like Houston, as much as 66 percent of the hotels financed with securitized debt are now delinquent, according to Trepp, or $664 million worth of delinquent CMBS loans.