Second in the three-part series, "The Second Wave of the Credit Crisis"; with reporting from Fox News analyst James Farrell

The securitization market for commercial real estate has historically provided much of the liquidity for commercial real estate market loans.

But it has since frozen over, with commercial mortgage-backed securities, or CMBSs, at one point seemingly priced for the Ice Age. That makes refinancings of these loans painfully hard to come by.

And the securities built on the backs of bad commercial loans are quickly souring, potentially creating more writedowns and losses.

Wall Street sold an estimated $230 bn of CMBS in 2007, a record year, versus a teensy $10 bn last year and nearly zero so far this year.

Since securitizations have dried up, commercial property owners are making a desperate bid to sit on their properties. While some analysts say, ironically, that waiting out the storm may help to put a floor under prices, as owners don't want to sell into a plunging market, the commercial loans going belly up are stinging the bonds built on them, creating potential writedowns and losses for the banks, insurers and companies like GE, Freddie Mac and Fannie Mae who own them.  

Realpoint, a credit-rating agency, says that in the twelve months to June, nearly $28.65 bn of CMBSs, around 3.5% of the total, have become delinquent.

That's the tenth straight month of delinquencies, "up an astounding 585% from one-year ago" and is now almost 13 times the low point of $2.21 bn in March 2007," Realpoint says.

Realpoint believes the delinquency rate could veer towards 6.6%, even 8%, by the end of the year. It says: "We now expect the delinquent unpaid CMBS balance to continue along its current trend and grow in excess of $50 bn to $60 bn before the end of 2009."

Deutsche Bank Securities Richard Parkus, a research analyst specializing in commercial mortgage-backed securities, or CMBSs, says many commercial securities deals are jammed with loans of increasingly dubious quality taken out during the height of the bubble years, from 2005 to 2007.

Although Parkus is mostly worried about commercial mortgages held by banks rather than CMBS investors, the securities still pose a danger.

Parkus says that banks tend to make commercial loans with shorter maturities than the 10-year mortgages commonly found in the CMBS market. And he says from now until 2013, the bulk of maturing commercial loans made in the bubble years will be the ones held in bank portfolios.

Parkus calculates the default rate of the loans in these deals could hit as high as 12% or as much as $90 bn. Together with all rotten commercial real estate and construction loans, banks could be hit with more than $200 bn in losses.

About two-thirds of loans that have CMBSs built on them and that are maturing over the next decade won't qualify for refinancing without big equity infusions--on the order of $100 bn, Parkus warns.

Steven Sandler of the private equity firm Crosswind Capital in Rye, NY agrees.

"The reality is that CMBS accounts for less than 25% of all commercial mortgage debt," he says. "Not to diminish the severity and reach of the CMBS problem, but the bulk of the risk in the system is commercial bank loan generated."

Sandler adds: "The same company of actors that needed resuscitation from the effects of the housing crisis may need saving from the debilitation of the commercial real estate bubble."

Parkus testified at a recent hearing in Washington, DC that, because of these problems, the bottom in commercial real estate is several years away, and it will be at least 2012 before there is "palpable improvement" in the commercial property market.

Next: A government rescue of the commercial real estate market--will it be enough, or will it be too late?