The CMBS loan securitization process involves a lender taking a variety of conduit loans, often up to 100 at a time, pooling them together, and selling them as bonds. Typical conduit lenders usually have between 3 and 8 securitizations each year. During securitization, each CMBS is broken into tranches, or segments, which can give investors a variety of options when it comes to risk, rate of return, and payment priority. For example, the lowest-risk tranches will be paid first, but have lower interest rates, while the highest risk tranches will be paid last, but will usually have a significantly higher interest rate. 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.

The main benefit of CMBS loan 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:

• www.multifamily.loans/apartment-finance-blog/what-are-the-advantages-of-securitization
• www.multifamily.loans/apartment-finance-blog/how-the-cmbs-securitization-process-works-a-guide

The risks associated with CMBS loan securitization include the fact that CMBS loans are not serviced by their original lenders, but instead 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. Securitized loans can also 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.

Sources:

• www.multifamily.loans/apartment-finance-blog/what-are-the-advantages-of-securitization
• www.multifamily.loans/apartment-finance-blog/how-the-cmbs-securitization-process-works-a-guide
• cmbs.loans/blog/cmbs-loan-securitization-process

The CMBS loan securitization process involves a lender taking a variety of conduit loans, often up to 100 at a time, pooling them together, and selling them as bonds. During securitization, each CMBS is broken into tranches, or segments, which can give investors a variety of options when it comes to risk, rate of return, and payment priority. Most conduit lenders have between three and eight securitizations per year.

The key steps in the CMBS loan securitization process are:

• A lender takes a variety of conduit loans, often up to 100 at a time.
• The loans are pooled together and sold as bonds.
• The CMBS is broken into tranches, or segments.
• Investors have a variety of options when it comes to risk, rate of return, and payment priority.
• Most conduit lenders have between three and eight securitizations per year.

CMBS loans are pooled together with other loans to create a commercial mortgage-backed security (CMBS) which is then traded on the open market. This is different from traditional loan financing, where the loan is kept on the lender's balance sheet. 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. CMBS loans are often significantly easier to get approved for than traditional bank loans, and will usually offer rates very competitive with bank financing (if not substantially better). Banks will generally put a lot of emphasis on a borrower’s credit score, net worth, and commercial real estate experience, whereas CMBS financing is based more on the property itself. CMBS borrowers will not continue to deal with the same lender that originated their loan during the remainder of its life; instead, they will have to work with a loan servicer, referred to as a master servicer. If a borrower defaults on their loan, they will have to work with another type of servicer, known as a special servicer.

Sources:

• www.multifamily.loans/apartment-finance-blog/how-the-cmbs-securitization-process-works-a-guide
• cmbs.loans/blog/cmbs-primer