Lowey Dannenberg is investigating possible violations of federal securities laws on behalf of investors in commercial mortgage backed securities (CMBS) issued by more than a dozen global banks, including Wells Fargo, Deutsche Bank, and Ladder Capital.
Commercial Mortgage Backed Securities (CMBS) are fixed-income investment products collateralized by real estate loans taken out on commercial properties, such as office buildings, hotels, malls, and apartment buildings and factories. CMBS are created when a bank pools a group of loans on its books, bundles them together, and then sells them in a securitized form as a series of bonds. In 2019 alone, private lenders in the U.S. issued nearly $100 billion in CMBS, representing a 27% increase over the year before.
Last year, a whistleblower complaint was field with the Securities and Exchange Commission (SEC), accusing some of the world’s biggest banks, including Wells Fargo and Deutsche Bank, of engaging in a “systemic fraud that allowed them to award borrowers bigger loans than were supported by their true financials.” According to the complaint, lenders have regularly altered financial data for commercial properties to make the properties appear more valuable, and borrowers more creditworthy. For example, the historical profits for certain buildings were listed as much as 30% higher than the profits previously reported for the same building in the same year when the property was part of a different CMBS. An increase in profit can lead to an approval of a significantly higher mortgage, causing that properties end up with borrowers who cannot afford to pay back the mortgage that underlies them. This, in turn, creates a misperception of the riskiness and quality of the CMBS, which commercial mortgages are bundled into.
The decline in economy caused by the coronavirus pandemic has already began to expose the overvaluation of commercial real estate. The most recent data shows a sharp spike in missed payments to CMBS bondholders, with more than one fifth of all CMBS loans being categorized as either “in grace period” or “beyond grace period.” In fact, the rate of non-payment of hotel loans increased 10-fold from about 1.5% in March to 19.9% in April, representing $15 billion worth of loan payments being considered late. Similarly, the non-payment of retail loans increased almost 5-fold from 1.7% in March to 9.6% in April, representing $12 billion worth of payments being considered late. With the ongoing lockdown, these figures are expected to climb even more.
Our factual and legal investigation and the findings of an economic expert analysis confirm the skyrocketing delinquency rates in the CMBS and the discrepancies in the reported figures for the underlying commercial real estate properties, including their historical net operating profits, reported expenses, occupancy rates, and loan-to-value ratios. We suspect that the origination of CMBS is being manipulated to create a misperception that the CMBS are less risky, less volatile, and more secure than they are, in fact.
If you are an investor in CMBS who suffered a loss, we encourage you to contact our attorneys at Lowey Dannenberg at (914) 733-7238 or investigations@lowey.com to learn more about this investigation or to discuss your options.
Whistleblowers: Persons with non-public information regarding CMBS should consider their options to help in the investigation or take advantage of the SEC Whistleblower program. Under the new program, whistleblowers who provide original information may receive rewards totaling up to 30 percent of any successful recovery made by the SEC.