Wednesday, March 7, 2007

Mortgage Risk Premiums Increasing

From the WSJ:

Turmoil in the market for bonds backed by home mortgages is starting to infect its commercial cousins: mortgage bonds backed by office towers, hotels and shopping malls.

The cost of insuring commercial-mortgage-backed securities as measured by an index known as the CMBX has jumped since late last month. The spread on the index that tracks riskier, BBB-minus-rated bonds has doubled to 1.64 percentage points this week from 0.84 percentage point on Feb 23, according to Markit Group, which administers the index.

"Moves of this magnitude and speed are uncommon in the unusually calm CMBS markets," noted analysts from Lehman Brothers in a report this week.

Mortgages are eventually pooled with other mortgages of similar maturity and interest rate and sold to investors. This process is done for all mortgage products. The commercial mortgage backed market is usually considered more secure because businesses are considered more stable than households.

If this market is seeing an increase in its risk premium, other markets must be. That means the cost of issuing and packaging mortgages has gotten more expensive.