Commercial Mortgage Backed Securities Are Back

Like a convalescent patient up off his rumpled sick bed, commercial mortgage backed securities (CMBS) are back. Some things are better left for dead. But good bad or otherwise, Macquarie CountryWide Trust is selling Australia’s first CMBS since 2007. So who’s buying?

Today’ Age reports that the Trust will try to raise $280 million from the issue. Some of that will be used to pay off nearly $450 million in securities that mature in December. Hmm. Selling more debt to pay off old debt. There’s never a bad time for that if you don’t have cash.

CEO Steven Sewell says the collateral for the issue will be 44 commercial properties which earn 60% of their revenues from retailers Coles and Woolworths. That so excited credit ratings agency Fitch that it gave the issue an AAA rating. So did Standard and Poor’s.

It’s good to know the ratings agencies are vouching for more mortgage backed securities. And maybe they are right. Debt securities collateralized by brand-name retailers are probably better bets than debt securities collateralised by household mortgages. But we thought that this whole era of selling debt as if it were an asset had been put to the sword in the last eighteen months. Apparently not.

Necessity may be driving the issuance, rather than any real sense that this is stuff investors want to buy now. Fitch estimates that over $3.4 billion CMBS need to be refinanced this year. It reckons 44% of the entire Aussie CMBS market matures between now and the end of the year, creating what it calls a “maturity hump.”

Normally, if you’re on a push bike, you can take the jumps and ride over the humps. But if you’re a big commercial mortgage backed securities market, taking the jumps and riding over the humps is a little riskier. You could crash.

What everyone must be hoping/praying for (dreaming about, betting on) is that the deterioration in bank collateral is finally over. That collateral – mostly commercial and residential real estate – has been in various rates of decline in the Western world. But yesterday we learned that U.S. home sales were actually up 9% in July. Prices haven’t zoomed up yet. But is it a sign that the collateral value collapse is over, meaning assets backed by this collateral are safe to buy again?

We wouldn’t count on it. We suspect that many of the firms issuing CMBS will end up owing more than they can expect to generate in profits from their assets. But there is a bizarre vibe in the markets right now. It’s as if a lot of people are pretending the last two years simply didn’t happen. They want to reflate asset values and get back to the boom times. But they want to do it with more debt.

The idea that fundamental damage has been done to the household balance sheet, and that we are in for years of deleveraging, doesn’t compute. So it’s ignored. And the idea that structured finance may never recover to its 2007 highs is simply too horrible to think about. So it’s not mentioned in polite company.

However in point of fact, the property sector has already rebounded, as you can see from the chart below. The S&P/ASX 200 A-REIT sector has bounced almost 52% since crashing to its low on March 6th. Lord Swarm is out of the office this week. But we’ll ask him next week what this chart looks like from a technician’s perspective and whether it’s a rally you should sell…or buy.

Aussie A-REITs Rally 52%

What about the market for residential mortgage backed securities (RMBS)? That one is too important politically to go without some form of government meddling. The Australian Office of Financial Management has been busy since last year buying up nearly $6.7 billion or RMBS issue by big banks and not so big non-authorised deposit taking institutions.

That’s just a fancy way of saying someone has to loan to the first home buyers. And if the banks (authorised deposit taking institutions) aren’t willing to do it, the government has to make sure someone else will. So it’s been funding non-ADIs to do just that. The non-ADIs fund themselves by selling RMBS because they don’t have deposits or other assets.

Since the program began last year, the AOFM has bought up $3.2 billion in RMBS from ADIS and $3.45 billion from non-ADIs. One potential problem, according to this note, is that the AOFM was only authorised to buy up to $4 billion RMBS from ADIs. It is rapidly hitting that ceiling.

So what do you reckon will happen? We reckon the government is going to find another few billion to keep the RMBS market ticking over. If there are no investors for RMBS, the non-ADIs can’t make loans to marginal borrowers and the ADIs can’t offload their loan risk on the taxpayer. The housing market must be supported!

Meanwhile, in Gorgon news, former rock star and current Federal Environment Minister Peter Garrett did as he was told and approved the LNG project at Barrow Island. Good thing, too, considering the government has already announced the sale of that gas to China. It would have been awkward to knock back the project at this point.

Your editor is still a bit under the weather from his throat infection (incorrectly referred to yesterday as a virus). Fortunately, today is the last day we have to take the dreaded antibiotics. Until tomorrow…

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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6 Comments on "Commercial Mortgage Backed Securities Are Back"

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So the AOFM has been drawing cheques on my account to put a bid under the RMBS market? There is no problem with the $4 billion ceiling, since the government will just raise the ceiling, as is about to happen with the US government debt ceiling.

Gold just keeps on looking better.


In the UK RBS is selling to its subsidiaries. Hey presto – marked to market!


Dan, this article demonstrates you are illiterate on the subject of structured finance and that you don’t even understand some basic concepts in financial markets.

Read the article after the antibiotics wear off, you’ll get my drift.

Pat Donnelly

Just because American issuers of debt lied about the asset value does not mean that investors stopped investing altogether. They appear to be about to buy well backed securities. Ausralian securities. In AUD. Probably a lot safer than US stocks!


Is there any way I can short these new REITs?
I am shorting some US ones which has worked out nicely so far.


look at the AOFM purchases of RMBS form just 2 nonADI’s
Firstmac about 1bn lobbiest was K Rudds campaign manager
Members Equity Bank owned by the ACTU

Keep looking and you note that the funds will not dry up.

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