Commercial Mortgage Backed Securities

Summaries

Agency MBS are those issued by government backed agencies (e.g. Ginnie Mae, Freddie Mac, Fannie Mae).

Not all loans can form the pool for agency passthrough securities. These loans are non-conforming loans. But they can be used to from non-agency MBS. Therefore, they have credit risk also.

Usually agency CMOs are formed by splitting up a pool of passthrough securities. But non-agency CMOs are created directly from the nonconforming loans because non-agency loans are rarely securitized. (Whole loan CMO)

Commercial Mortgage Backed Securities (CMBS) are backed by income-producing real estate.

CMBS is a nonrecourse loan, which means the lender can only look into the collateral as a means to repay a delinquent loan. However, for residential MBS, he can go to the borrower personally.

CMBS looks into the credit risk of the property not the borrower.

1. Debt-to-service coverage ratio = Net Operating Income/ Debt Service

NOI is before any personal income. The ratio needs to be >1.

2. Loan-to-value ratio = current mortgage amount / current appraised value

Call Protection in CMBS

1. Loan Level:
1. Prepayment Lockout (2-5years)
2. Defeasance – use the prepay to buy US treasury securities
3. Prepayment Penalty (5-4-3-2-1) (5% of principal on the first year)
4. Yield maintenance charges – borrower is charged by the amount of interest lost by the lender.
2. CMBS level