The recent problems of the subprime mortgage market have provided a stunning example of how interconnected the housing market and Wall Street have become. In this article, Cathy Powers, managing director for core fixed income strategies at Standish Mellon, examines some disturbing parallels between lending practices in the sub-prime market and those in the commercial mortgage market. As with sub-prime loans, commercial mortgages are packaged and sold to investors, with some $700 billion worth of commercial mortgage-backed securities (CMBS) outstanding. Among the points Cathy discusses:

• Lending terms in the commercial mortgage market have been extremely easy.
• Debt service coverage has been shrinking.
• Many CMBS are backed by non-amortizing, interest-only (I/O) loans, which increases risk to the lender.
• Conditions in the commercial mortgage market are still good, but overextended credit may come back to haunt it in the future.

For more information or a hard copy please contact, please contact Alex Over at Standish Mellon Asset Management at 617 248-6339.