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Asset Securitization: Theory and Practice by JOSEPH C. HU

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Chapter 11

Commercial Mortgage-Backed Securities

The commercial mortgage-backed securities (CMBS) market is one of the youngest sectors of the asset securitization market. While it already existed in the mid-1980s, the CMBS market only began to develop rapidly after the mid-1990s. From the cash-flow structure point of view, a CMBS is no different from an RMBS discussed in the previous chapters. However, the underlying assets of CMBS are markedly different from those for RMBS with respect to the underwriting criteria, the securing properties, and the sources of the cash flow to service the mortgage debt. In addition, and more important, commercial mortgages on average have significantly higher incidences of default than prime residential mortgages. As a result, for credit rating purposes the credit support levels for CMBS are substantially higher than those of private-label mortgage securities but lower than subprime mortgage-backed securities.

This chapter will first present a brief history of the development of the CMBS market. It will then compare features of commercial mortgages with those of residential mortgages. Like the previous chapters, a typical transaction will be used as an example to illustrate the salient cash-flow structure and credit enhancement of a CMBS. The incidence of default, which is a particularly important factor that contributes to the prepayment of commercial mortgages, will be discussed along with the empirical evidence of default frequency and loss ...

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