Unexpected holdback stuns mortgage bond investors

Stav Gaon, from Academy Securities Inc., pointed out that this could be the largest holdback ever witnessed in this segment of the US securities market. This move not only poses immediate financial implications for the investors involved but also introduces a layer of unpredictability regarding how servicers will handle troubled assets moving forward.

“This is a risk investors did not expect,” Gaon said in a Bloomberg report.

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The loan in question was initially taken out by Veritas Investments and Baupost Group in 2020, covering over 60 apartment complexes in San Francisco and was later packaged into CMBS by Goldman Sachs in 2021. The ensuing challenges for apartment landlords, exacerbated by the Federal Reserve’s aggressive rate hikes, culminated in Veritas and Baupost defaulting on the $675 million loan.

Despite the ensuing controversy over the sale price of the loan, Midland proceeded to sell it to Brookfield for approximately $513 million, resulting in a loss of nearly 25% of the loan’s original value.