The rating agency Standard & Poor's released a report in late May about the overvaluation (if that is a word) of office and hotel property loans that make up the commercial mortgage backed securities (CMBS). There are many investors buying these loans such as insurance companies, pension funds, foreign investors, REITS and CMBS issuers. The number of investors is driving up the prices of these loans and overly optimistic appraisals are providing the backstop for them. The appraisals are assuming that rents will increase and vacancy rates will decrease. The normal process is to value the properties based on current rents and vacancy rates.
Other dicey situations include: one of the hotel loans within a CMBS has an "incentive management fee" that has priority to be paid before the loan, an increasing number of loans that have one tenant, loans based on leases expiring before the loan term ends, more partial interest loans and more complex deals.
The source can be viewed here.
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