by Brian Mahany
Until the market crash a few years ago, commercial mortgage backed securities (“CMBS’s”) were one of the most common forms of real estate finance. In the typical CMBS transaction, several mortgage loans are pooled together and transferred to a trust. The trust then issues bonds that are rated by various credit rating agencies according to their risk.
CMBS’s were made popular by a creation in the tax code that allows the trust to be a pass through entity and avoid tax. The tax benefit coupled with their liquidity makes them attractive to investors. Unlike conventional commercial mortgages, there is a secondary market for these securities.
Although many experts say the economy is improving, commercial real estate continues to lag. A wave of commercial property failures could spur a wave of CMBS defaults. And that will likely spur claims against the promoters, brokers and credit rating agencies involved with them. One research firm has calculated that overall, 9.39% of all CMBS’s are in default.
Another firm estimates there were $650 billion in CMBS securities issued between 2005 and 2007. By 2010, that number dropped to just $10 billion.
Already several lawsuits have been filed against companies and their officers and directors for failing to properly disclose the risky nature of these instruments. Investor suits under the Securities Act of 1933 face an uphill challenge because of the short statute of limitations. Creative lawyers, however, will likely find a way.
Is one of these securities in your portfolio? You may have a case against the person or promoter who recommended it to you. A credit rating agency that gave the investment a good recommendation may have some responsibility as well.
If you find a commercial mortgage backed security in your portfolio, talk to your lawyer. There is a very short time period if you wish to sue under the securities laws.
As the economy improves, expect to see another wave of CMBS offerings. Should you invest in the newer bond instruments? My general rule of thumb is that if you can’t understand the details of the investment, it probably is not something that belongs in your portfolio.
Mahany & Ertl is a full service law firm that helps victims of fraud recover their hard earned money. Our securities lawyers and asset recovery lawyers have helped people across the U.S. With offices in Milwaukee, Wisconsin; Detroit (Birmingham), Michigan and Portland, Maine, we can help if you are the victim of unsuitable investments, bad brokers or faulty legal advice.
We have a former FINRA panelist on our legal team; experience not found in most in law firms. For more information and a no obligation, no nonsense consultation, contact attorney Brian Mahany. Brian can be reached at (414) 704-6731 (direct) or through the firm’s website, https://www.mahanyertl.com