Commercial real estate loans are mortgages that use apartment buildings, office buildings, or other commercial real estate as collateral.
An article in the New York Times discussing the securitization of commercial real estate loans makes the following observation:
The boom in commercial mortgagebacked securities in the middle of the last decade provided a lot of money for underwriters, enabled banks to earn fees from making and servicing bad loans and allowed property owners to withdraw large amounts of cash. The losers were the investors.
a. What is securitization?
b. Why would banks make bad commercial real estate loans? Don’t banks lose money if these loans default?
c. Why would investors buy securities that contain bad commercial real estate loans? Is it likely that the interest rates on these securities were high enough to compensate investors for the additional risk involved with these securities? Briefly explain.