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. From an investing standpoint, CMBSs are often compared to RMBSs (residential mortgage-backed securities), which are securities based on residential mortgage loans. 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.

The CMBS securitization process involves pooling a variety of loans together 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.

Much like RMBS, 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.

For more information, please visit this guide on 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?

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).

Commercial mortgage-backed securities are primarily available for the financing of any income-producing commercial property. This includes:

• Multifamily assets (including mixed-use properties)
• Hospitality assets
• Office assets
• Retail assets
• Industrial assets

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

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.