If this one doesn’t send shivers down your spine then you have truly become immune to crises. Moody’s announced yesterday that they intend to commence a sweeping review of commercial mortgage backed securities. In case you’ve surpressed the memories, this is how the downward spiral with residential mortgages started.

Moody’s said they will review $302.6 billion of the securities which represents about half of of the bonds outstanding. They estimate that up to $80 billion may be downgraded.

Moody’s is focusing on loans made from 2006 to 2008, when banks loosened their underwriting standards during the real-estate frenzy.

Also in focus are single-borrower deals, which are riskier than multiple-borrower offerings, with the risks spread over many different people as well as different kinds of commercial buildings and geographic locations.

The rating agency now expects the CMBS deals issued from 2006 to 2008 to incur losses of about 5% on average, up from its original expectation of 2%.

Moody’s expects the ratings on about $84 billion of the CMBS bonds likely will be downgraded as a result of the review, affecting the bonds from the below-investment-grade classes to the junior triple-A level.

A large portion of CMBS bonds is held by banks, insurance companies and mutual funds. Ratings cuts on those bonds may force some investors to sell, as they can hold only securities with a certain rating.

This is another inflection point for the banking industry. Many of the smaller regional banks as well as community banks went all in on commercial real estate. While in many cases the loans they hold on their balance sheets haven’t been securitized, Moody’s general reappraisal of the credit quality of commercial real estate loans is going to force them into deeper loss provision and recognition.

This will probably be the year in which we see this sector of the banking industry severly impacted.

more: here