Commercial mortgage-backed securities (CMBS) are a type of

mortgage-backed security A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment b ...

backed by commercial and multifamily mortgages rather than residential real estate. CMBS tend to be more complex and volatile than residential mortgage-backed securities due to the unique nature of the underlying property assets. CMBS issues are usually structured as multiple

tranche In structured finance, a tranche is one of a number of related securities offered as part of the same transaction. In the financial sense of the word, each bond is a different slice of the deal's risk. Transaction documentation (see indenture) ...

s, similar to collateralized mortgage obligations (CMO), rather than typical residential "passthroughs." The typical structure for the

securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...

of commercial real estate loans is a

real estate mortgage investment conduit A real estate mortgage investment conduit (REMIC) is "an entity that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors" under U.S. Federal income tax law and is "treated like a partnership for Federal i ...

(REMIC), a creation of the tax law that allows the trust to be a pass-through entity which is not subject to tax at the trust level. Many

American American(s) may refer to: * American, something of, from, or related to the United States of America, commonly known as the "United States" or "America" ** Americans, citizens and nationals of the United States of America ** American ancestry, pe ...

CMBS transactions carry less prepayment risk than other MBS types, thanks to the structure of commercial mortgages. Commercial mortgages often contain lockout provisions (typically a period of 1-5 years where there can be no prepayment of the loan) which they can be subject to

defeasance Defeasance (or defeazance) (french: défaire, to undo), in law, an instrument which defeats the force or operation of some other deed or estate; as distinguished from ''condition'', that which in the same deed is called a condition is a defeasan ...

, yield maintenance and prepayment penalties to protect bondholders. European CMBS issues typically have less prepayment protection. Interest on the

bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemica ...

s may be a fixed rate or a floating rate, i.e. based on a benchmark (like LIBOR/EURIBOR) plus a spread.

Organization

''The following is a descriptive passage from the "Borrower Guide to CMBS" published by the Commercial Mortgage Securities Association and the

Mortgage Banker's Association The Mortgage Bankers Association (MBA) is the United States national association representing all facets of the real estate finance industry. Headquartered in Washington, D.C., MBA represents over 2,200 member companies. MBA’s membership base in ...

'': Commercial real estate first mortgage debt is generally broken down into two basic categories: (1) loans to be securitized ("CMBS loans") and (2) portfolio loans. Portfolio loans are originated by a lender and held on its balance sheet through maturity. In a CMBS transaction, many single mortgage loans of varying size, property type and location are pooled and transferred to a trust. The trust issues a series of bonds that may vary in yield, duration and payment priority. Nationally recognized rating agencies then assign credit ratings to the various bond classes ranging from investment grade (AAA/Aaa through BBB-/Baa3) to below investment grade (BB+/Ba1 through B-/B3) and an unrated class which is subordinate to the lowest rated bond class. Investors choose which CMBS bonds to purchase based on the level of credit risk/yield/duration that they seek. Each month the interest received from all of the pooled loans is paid to the investors, starting with those investors holding the highest rated bonds, until all accrued interest on those bonds is paid. Then interest is paid to the holders of the next highest rated bonds and so on. The same thing occurs with principal as payments are received. This sequential payment structure is generally referred to as the "waterfall". If there is a shortfall in contractual loan payments from the Borrowers or if loan collateral is liquidated and does not generate sufficient proceeds to meet payments on all bond classes, the investors in the most subordinate bond class will incur a loss with further losses impacting more senior classes in reverse order of priority. The typical structure for the securitization of commercial real estate loans is a

(REMIC). A REMIC is a creation of the tax law that allows the trust to be a pass-through entity which is not subject to tax at the trust level. The CMBS transaction is structured and priced based on the assumption that it will not be subject to tax with respect to its activities; therefore, compliance with REMIC regulations is essential. CMBS has become an attractive capital source for commercial mortgage lending because the bonds backed by a pool of loans are generally worth more than the sum of the value of the whole loans. The enhanced liquidity and structure of CMBS attracts a broader range of investors to the commercial mortgage market. This value creation effect allows loans intended for securitization to be aggressively priced, benefiting Borrowers.

Industry participants

Master servicer

The master servicer’s responsibility is to service the loans in the pool through to maturity unless the borrower defaults. The master servicer manages the flow of payments and information and is responsible for the ongoing interaction with the performing borrower.

Primary servicer (or sub-servicer)

''(Also see

primary servicer The term primary servicer refers to companies that monitor and manage loans. The primary servicer of a loan can be the loan originator, the mortgage banker or a third party and maintains direct contact with the borrower. If the loan falls into d ...

)'' In some cases the borrower may deal with a primary servicer that may also be the loan originator or mortgage banker who sourced the loan. The primary servicer maintains the direct borrower contact, and the master servicer may sub-contract certain loan administration duties to the primary or sub-servicer.

Special servicer

''(Also see

special servicer Loan servicing is the process by which a company (mortgage bank, servicing firm, etc.) collects interest, principal, and escrow payments from a borrower. In the United States, the vast majority of mortgages are backed by the government or governme ...

)'' Upon the occurrence of certain specified events, primarily a default, the administration of the loan is transferred to the

. Besides handling defaulted loans, the special servicer also has approval authority over material servicing actions, such as loan assumptions.

Directing certificateholder / controlling class / B-piece buyer

The most subordinate bond class outstanding at any given point is considered to be the directing certificateholder, also referred to as the controlling class. The investor in the most subordinate bond classes is commonly referred to as the "B-piece buyer". B-piece buyers generally purchase the B-rated and BB/Ba-rated bond classes along with the unrated class.

Trustee

The trustee’s primary role is to hold all the loan documents and distribute payments received from the master servicer to the bondholders. Although the trustee is typically given broad authority with respect to certain aspects of the loan under the Pooling and Servicing Agreement (PSA), the trustee typically delegates its authority to either the special servicer or the master servicer.

Rating agency

There will be as few as one and as many as four rating agencies involved in rating a securitization. Rating agencies establish bond ratings for each bond class at the time the securitization is closed. They also monitor the pool’s performance and update ratings for investors based on performance, delinquency and potential loss events affecting the loans within the trust.

References

External links

Testing the Efficiency of the Commercial Real Estate Market: Evidence from the 2007-2009 Financial Crisis
paper by Otto Van Hemert, NYU Stern & AQR Capital Management
Discovering Distressed Assets: Whole Loan Workouts and Recapitalization Opportunities
CMBS analysis whitepaper by Benjamin Polen, Newman Real Estate Institute, Baruch College {{DEFAULTSORT:Commercial Mortgage-Backed Security Fixed-income securities Structured finance Mortgage-backed security de:Mortgage_Backed_Securities#CMBS