On top of all of this are the tens of billions of maturing loans from 06-07. We had all thought this would all get resolved, but given all of the above there may not be a refi market to be able to move this amount of paper to clean up the maturities. That squeezes out the new issue possibilities even if the market becomes more functional and pricing settles down. Recently Morningstar issued a report which suggests the default rate on these maturing loans could be fairly high, since the NOI is not adequate, or the leverage levels allowed by the market are not sufficient to cover the old loan.

Bottom line to all of this is that there will be little liquidity and good pricing in the loan market, which then leads to lower leverage, and that means pricing has topped out for CRE assets. There is already some data to suggest this is already happening, but unless things suddenly change for the better, the decline in CRE values will accelerate.

It appears that the CMBS market may be headed to a rough period and may be contracting substantially. I am told the 25 small shops which primarily originate and sell paper to the 7 big banks who issue the bonds, have run out of liquidity because the banks are not buying anymore paper at the moment. This is because the market for the bonds has become very limited and they already have inventory of paper to sell. If the banks are not buying paper form the originators, then the small shops can't issue new loans and the system grinds to a halt, or contracts materially. This situation is not likely to be mitigated anytime soon, and may get worse if the bond market volatility does not end soon, which it is not likely to do. Given the world economic uncertainty, the continuing decline in the prospects for a sustainable recovery in Europe and China, and the near term collapse of Brazil and Venezuela, there is nowhere around the world to look for stability and growth for quite awhile.

Now we add to this the implementation of the retention rule and the confusion of how this will really work and how to price the risk, and the originators and banks are at a loss as to pricing this risk and cost of the added 5% capital. If the originators cannot price the paper, and the buyers of the paper cannot price it, the system grinds down or pricing becomes much wider than it already has to account for the uncertainty. So even if loans do get issued and closed, pricing will most likely get wider even without a Fed increase in June. Leverage is also likely to be reduced where issuers do not feel they have a good handle on the risk and pricing. The risk premium has to increase.

Just to complicate matters more, the circus we now call an election, has unnerved many offshore investors who are already expressing fear of trump or Hilary. We are getting feedback already from our Asia partners that there is great concern that the US will not have a sound government. There are many in the US who are normally very calm and rational about politics, but who are now at their limit of sanity thinking about the choice of a bribe taking crook and liar, or a ego maniac who may be mentally unstable and who is known as a complete sleaze. It seems pretty clear Hillary and Bill set up the foundation to take bribes and to facilitate their lifestyle by taking the bribe payments into the Canadian foundation where donor names are legally hidden, laundering it, and then moving it on to the US foundation where names are not known. The private server was to be able to have hidden emails that could be deleted later regardless of harm to national security. Now that the computer guy is spilling the beans to the FBI, this will soon ramp up to grab the two assistants, and it is looking more and more like Watergate. It is just a matter of time until the story unravels. Then do we get an old socialist? Or do we get a megalomaniac who nobody knows what he really believes and who thrives on acting like a jerk. The closer we get to the election, the more this circus will unnerve investors. CMBS bonds are not top of list buys when the world looks so screwed up.

Even top economists now say they are not able to forecast much because nobody has any idea who will be president and what will happen after the election.

On top of all of this are the tens of billions of maturing loans from 06-07. We had all thought this would all get resolved, but given all of the above there may not be a refi market to be able to move this amount of paper to clean up the maturities. That squeezes out the new issue possibilities even if the market becomes more functional and pricing settles down. Recently Morningstar issued a report which suggests the default rate on these maturing loans could be fairly high, since the NOI is not adequate, or the leverage levels allowed by the market are not sufficient to cover the old loan.

Bottom line to all of this is that there will be little liquidity and good pricing in the loan market, which then leads to lower leverage, and that means pricing has topped out for CRE assets. There is already some data to suggest this is already happening, but unless things suddenly change for the better, the decline in CRE values will accelerate.