Mortgage Backed Securities: Commercial vs. Residential

Mortgage backed securities (MBS) come in two main varieties; commercial mortgage backed securities (CMBS) and residential mortgage backed securities (RMBS). While CMBS are backed by large commercial loans, referred to as CMBS or conduit loans, RMBS are backed by residential mortgages, generally for single family homes. Residential mortgage backed securities may be backed by a variety of different kinds of residential loan products, such as home equity loans, as well as FHA loans.

A commercial mortgage backed security, in contrast, is limited to being backed by loans on income-producing commercial properties, such as retail centers, hotels, office buildings, and apartment buildings. Less commonly, CMBS loans are issued to other income-producing properties like parking garages and marinas.

Both CMBS and RMBS are structured into different tranches, or sections, based on the risk of the loans. The highest tranches get paid off first in the case of a loan default, while lower tranches will get paid off later (or not get paid off at all), should the borrowers fail to pay back their loans.

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