CMBS securitization involves pooling commercial mortgage loans to create a commercial mortgage-backed security (CMBS) that is traded on the open market. CMBS loans are divided into tranches of different credit quality/risk, with lower-risk tranches paid first in the event of default. While most CMBS include multiple loans, single-asset, single-borrower (SASB) CMBS consists of a very large loan on one high-quality property. After securitization, CMBS loans are serviced by companies with fiduciary duties to investors, not borrowers, which can cause challenges like foreclosure after just one missed payment.
CMBS securitization involves pooling commercial mortgage loans to create a commercial mortgage-backed security (CMBS) that is traded on the open market. CMBS loans are divided into tranches of different credit quality/risk, with lower-risk tranches paid first in the event of default. While most CMBS include multiple loans, single-asset, single-borrower (SASB) CMBS consists of a very large loan on one high-quality property. After securitization, CMBS loans are serviced by companies with fiduciary duties to investors, not borrowers, which can cause challenges like foreclosure after just one missed payment.
CMBS securitization involves pooling commercial mortgage loans to create a commercial mortgage-backed security (CMBS) that is traded on the open market. CMBS loans are divided into tranches of different credit quality/risk, with lower-risk tranches paid first in the event of default. While most CMBS include multiple loans, single-asset, single-borrower (SASB) CMBS consists of a very large loan on one high-quality property. After securitization, CMBS loans are serviced by companies with fiduciary duties to investors, not borrowers, which can cause challenges like foreclosure after just one missed payment.
CMBS securitization involves pooling commercial mortgage loans to create a commercial mortgage-backed security (CMBS) that is traded on the open market. CMBS loans are divided into tranches of different credit quality/risk, with lower-risk tranches paid first in the event of default. While most CMBS include multiple loans, single-asset, single-borrower (SASB) CMBS consists of a very large loan on one high-quality property. After securitization, CMBS loans are serviced by companies with fiduciary duties to investors, not borrowers, which can cause challenges like foreclosure after just one missed payment.
When an investment Bank lender issues a CMBS loan, they will pool it in with a variety of other loans in order to create a commercial mortgage-backed security. These CMBS loans are similar to bonds, in the sense that they are traded on the open market.
CMBS Securitization: A Primer
When a conduit lender issues a CMBS loan, they will pool it in with a variety of other loans in order to create a commercial mortgage- backed security (CMBS). These CMBS loans are similar to bonds, in the sense that they are traded on the open market. From an investing standpoint, CMBSs are often compared to RMBSs (residential mortgage-backed securities), which are securities based on residential mortgage loans.
How Does a CMBS Loan Work?
Commercial mortgage-backed securities are divided into tranches,
each of which involves loans of a different credit quality/risk. Lower- risk tranches will be paid first in the case of a loan default, while higher-risk tranches are paid later. Most conduit lenders have between three and eight securitizations per year, but this can vary greatly based on the size of the lender and the size of the loans they issue.
Single-Asset, Single Borrower (SASB) Loans Generally
Consist of One, Securitized Loan
While most kinds of CMBS are created from many loans that are packaged together, Single-Asset, Single Borrower (SASB) CMBS consists of a very large loan on one property. In general, this will be a very high-quality (Class A) property in a top metropolitan area. SASB CMBS loans are typically $250 million to $1 billion. In some situations, SASB loans/securities can consist of a group of cross- collateralized, cross-defaulted properties owned by the same borrower.
CMBS Servicing and Securitization
After a CMBS loan is sold on the secondary market, it is typically
switched to a loan servicing company. This does not typically provide an ideal experience for the borrower, as the servicing company’s priorities may not be fully aligned with the borrower’s. Issues may crop up in situations involving prepayment penalties (servicers are not particularly flexible), as well as issues involving loan repayment. Unlike loans that are held and serviced by a lender, it can be very difficult for a borrower to get financial assistance (such as a commercial loan forbearance) that can prevent a potential loan default.
Related questions What is CMBS securitization?
CMBS securitization is the process of pooling together a variety
of commercial mortgage loans in order to create a commercial mortgage-backed security (CMBS). These CMBS loans are similar to bonds, in the sense that they are traded on the open market. The CMBS loans are divided into tranches, each of which involves loans of a different credit quality/risk. Lower-risk tranches will be paid first in the case of a loan default, while higher-risk tranches are paid later. Most conduit lenders have between three and eight securitizations per year, but this can vary greatly based on the size of the lender and the size of the loans they issue.
CMBS loans are a type of commercial real estate financing that
is secured by a mortgage on a commercial property.
What are the benefits of CMBS securitization?
The main benefit of CMBS securitization is that it makes it
easier for a borrower to get a commercial or multifamily real estate loan. It also allows for those loans to be offered on better terms, due to the fact that risks are split between multiple investors, instead of being held by one lender. For instance, a bank may offer a borrower a 70% LTV, five-year full-recourse loan, while a CMBS lender might be able to offer the same borrower 75%, 10-year, non-recourse financing. Additionally, a CMBS lender can generally take the proceeds they gained from selling the loan, and use them to make a new loan to another borrower.
Sources: What are the Advantages of Securitization?
What are the risks associated with CMBS securitization?
When compared to the upsides of securitization, there are
relatively few downsides. For borrowers, one potential downside includes the fact that CMBS loans are not serviced by their original lenders. Instead, they are serviced by a separate company, referred to as a master servicer. If the loan goes into default, it will be serviced by a special servicer. Both of these servicing companies hold a fiduciary duty to the CMBS investors, not the borrower, which can lead to significant challenges.
For instance, a special servicer may attempt to foreclose on a
property after just one or two missed mortgage payments. In addition, CMBS loans may also be more susceptible to technical defaults due to the strict rules that arise as a result of the securitization process. Technical defaults are defaults that occur for reasons other than a borrower failing to pay their mortgage, such as signing a lease with a tenant not approved by the loan servicer, or violating a loan’s special purpose entity (SPE) provisions.
In addition, securitized loans can lead to issues with the market
as a whole, though much of this risk has been reduced through tighter underwriting standards and new regulations, such as the risk retention rules mentioned earlier in this article. During the 2008 financial crisis, the CMBS market, which had grown considerably during the economic boom of the early and mid- 2000s, was racked by a series of catastrophic defaults. As a result, CMBS loan origination fell to a paltry $3 billion in 2009, down from $12 billion in 2008, and $229 billion in 2007 (in contrast, 2018 CMBS origination was approximately $77 billion).
What types of commercial real estate can be securitized
through CMBS?
Commercial mortgage-backed securities are primarily available
for the financing of any income-producing commercial property. This includes:
While this list is not exhaustive, many other property types fall into the larger categories listed above. There are also assets like parking garages and marinas that are a bit harder to classify. Regardless, as they are all examples of income- producing commercial properties, they are also eligible for CMBS financing.
Source: Apartment Loans and Commercial Real Estate Loans
What are the requirements for a CMBS securitization?
The requirements for a CMBS securitization vary based on the
size of the lender and the size of the loans they issue. Generally, conduit lenders have between three and eight securitizations per year. CMBS loans are divided into tranches, each of which involves loans of a different credit quality/risk. Lower-risk tranches will be paid first in the case of a loan default, while higher-risk tranches are paid later. For more information, please visit this guide on CMBS securitization.
