BLOOMBERG BUSINESSWEEK By Sarah Mulholland June 25, 2013Wall Street firms spent the past six months increasing commercial mortgage origination as investors bought the most debt in six years. That’s now backfiring as banks prepare to market $7.5 billion of loans earmarked to be sold as bonds before credit markets took a dive this month.Investors are demanding 1.2 percentage points more than the benchmark swap rate to buy new commercial mortgage backed securities tied to shopping malls, skyscrapers, hotels and apartment buildings, according to data compiled by Bloomberg. That’s up from 72 basis points in February, the narrowest spread since sales revived in 2009, the data show. Lenders’ profits are eroded when values of the securities fall.

The CMBS market is poised for its worst month in almost two years after the Federal Reserve signaled it may curb stimulus efforts as the economy shows sign of improvement. That’s complicating efforts by banks to sell new deals and making it more expensive for landlords to refinance loans backed by everything from Manhattan office space to suburban grocery stores. Barclays Plc estimated last week that $7.5 billion in new deals would be completed in the next two months.“This looked like it was going to be an unusually good year” for the commercial-mortgage backed securities market, said John Levy, a principal at John B. Levy & Co., a real estate investment banking firm based in Richmond, Virgina. “It throws a big monkey wrench in the works. The CMBS market will take a pretty good wallop in volume.”

More Lending

Lenders led by JPMorgan Chase & Co., Deutsche Bank AG (DBK), Goldman Sachs Group Inc. and Morgan Stanley have arranged about $39.6 billion in sales this year, Bloomberg data show. Morgan Stanley and Bank of America Corp. (BAC:US)sold top-ranked debt to pay a spread of 120 basis points over swaps yesterday, according to a person familiar with the offering, who asked not to be identified because terms aren’t public.Banks ramped up lending to commercial property owners with CMBS issuance poised to climb 50 percent to $70 billion this year, according to Credit Suisse Group AG. (CSGN) Sales had rebounded after plunging to $11 billion amid the credit market seizure in 2008 from a record $232 billion in 2007.

The increase helped landlords across the U.S. retire debt, with 81 percent of mortgages maturing this year paid on time, according to JPMorgan. The bank, which is forecasting $50 billion in sales linked to multiple property owners, said last week wider spreads could “modestly” reduce sales as banks have to offer more expensive terms to adjust for lower bond values.

Rising Rates

Loan rates for borrowers have climbed about 100 basis points, or 1 percentage point, over the past two months, JPMorgan analysts led by New York-based analyst Ed Reardon wrote in the June 21 report.The bank switched its recommendation on CMBS to “neutral” from a “longstanding overweight,” citing continued volatility and the prospect of increasing supply.

“We did not expect CMBS to experience this steep a selloff in anticipation of the end of” the Fed’s bond-buying program, the analysts wrote.

The market is turning after lenders bulked up their commercial-mortgage bond units to satisfy investor appetite as the central bank suppressed borrowing costs, pushing investors toward riskier assets.Bank of America in March lured Ken Cohen from UBS AG to run its commercial real estate finance group in New York after Switzerland’s largest lender cut its bonus pool.

See Opportunity

“We continue to see opportunity in the CMBS market and are thrilled to have Ken,” Michael Nierenberg, the head of global mortgages and securitized products at Bank of America, said in an e-mail. “While there is market volatility, we are still pricing deals and continue to view the business in the long term.”Credit Suisse began approaching borrowers this year with terms for commercial mortgages to be packaged into bonds as it sought to reenter the business after shutting its unit in 2011. The Zurich-based lender last month hired Mark Brown, a 20-year CMBS veteran, to restart the origination business, a person with knowledge of the move said, who asked not to be identified as it wasn’t publicly announced. Drew Benson, a Credit Suisse spokesman, declined to comment on the group’s plans.Fed Chairman Ben. S. Bernanke’s comments have roiled markets for residential and commercial property bonds even as real estate strengthens.