This time, it’s commercial mortgage back securities, and the default rate is about 4%, but this number is expected to quadruple if the economy slows down significantly.

Let’s note that this is commercial property, the stuff that’s supposed to be largely recession proof that we are talking about here:

Such a scenario corresponds “to the negative predictions currently offered by commercial real estate experts”, analysts at Fitch wrote. This would happen if the economy suffered a similar downturn to 1991, and assumes that the value of properties covered by the deals falls by 25 per cent, and cash flow from rents by 15 per cent.

The higher defaults under such a slowdown compares with a historical default rate of 7.9 per cent, and with the milder scenario that Fitch thinks is more possible of 0.8 per cent economic growth and a 13.7 per cent rate of default.

It would cause non-investment grade bonds – B and BB rated CMBS – to suffer loss rates of 100 per cent and 95.9 per cent, respectively. Meanwhile, 30.6 per cent of the lowest-rated investment grade bonds – BBB rated – would experience losses, while loss severities would rise to 37.9 per cent from an historical average of 33.5 per cent.

The data suggest that recently issued CMBS may fall victim to inflated property values and weaker underwriting standards experienced at the height of the US property boom in 2006 and 2007, as well as the weaker economy. Those bonds make up about 49 per cent of the outstanding CMBS market of more than $800bn. The survey covers all Fitch-rated bonds issued during those two years, making up 74 deals worth $217.3bn. That was about 60 per cent of all CMBS issued during the period.

These numbers are apocalyptic.