Since 2007, if not earlier, all the attention has been focused on the residential real estate troubles. But now the commercial real estate problems are about to come front and center.
In a research note today, Citigroup analysts estimated that "more than $75 billion of CMBS market capitalization has been lost" since the S&P request for comment on changes to their U.S. CMBS rating methodology was issued two days ago.
Our preliminary findings indicate that approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded.
60% and 90% writedowns are HUGE! That will involve hundreds of billions of dollars and the losses will be spread throughout the securities market. It could forced dozens of banks into insolvency.
Citi also noted that this will impact the CMBS legacy TALF announced last week by the Fed. According to Citi the "S&P changes could impact nearly 40% of the triple-A TALF eligible universe" and they expect the Fed to change their criteria.
The Fed won't buy non-AAA rated securities. Thus the banks won't be able to pass along the losses to the taxpayer...unless the Fed decides to buy worthless securities as well.