Chapter 34. Commercial Mortgage-Backed Securities

JAMES MANZI, CFA

Consultant

DIANA BEREZINA

Associate Director, Fitch Ratings

MARK ADELSON

Principal, Adelson & Jacob Consulting, LLC

Abstract: Commercial mortgage-backed securities (CMBSs) are a type of fixed income investment backed by commercial loans. They can be appealing to investors because they generally offer high credit quality, a reasonable degree of credit stability, cash-flow stability, and low-spread volatility. Choosing a particular CMBS investment involves careful consideration of the characteristics of the underlying commercial loans, bond structure, risk appetite, and typical deal features.

Keywords: commercial mortgage-backed securities (CMBSs), commercial loans, CMBS bond structure, CMBS deal features, prepayment penalties, defeasance, yield maintenance

This chapter is intended to provide an overview of the commercial-mortgage backed securities (CMBSs) market and the tools to choose between different CMBS investments based on relative value considerations, risk characteristics, and nuances in bond structure.

INVESTMENT CHARACTERISTICS OF TRADITIONAL (CASH) CMBS

CMBSs are backed by commercial mortgage loans. That is, the underlying mortgage loans are secured by commercial, rather than residential, real estate. In contrast to residential mortgage loans, most commercial mortgage loans in the United States do not allow for unrestricted prepayments by the borrowers. Accordingly, a key distinction between CMBS and residential ...

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