A Real Estate Mortgage Investment Conduit, or REMIC, is an entity which is utilized to pool loans and issue mortgage backed securities (MBS), or commercial mortgage backed securities (CMBS). First authorized by the Tax Reform Act of 1986, REMICs can be organized in several different ways, including corporations, trusts, or partnerships.
Asset backed securities (ABS) are financial securities backed by a pool of assets that produce income, generally loans. In the case of mortgage backed securities (MBS) and commercial mortgage backed securities (CMBS), the underlying assets are, respectively, residential and commercial mortgages. However, unlike MBS, asset backed securities are backed by non-mortgage loans, including auto loans, student loans, credit card debt, and variety of other types of debt.
While conduit loan issuances have risen steeply in the last few years, the amount of lenders has actually fallen slightly— and experts believe that’s a direct result of a new federal risk retention rule that took effect in Dec. 2016. Before the market crash of 2008, the CMBS market was incredibly hot, and lenders were quite liberal with who they provided loans to— especially because they knew they could transfer 100% of the risk to CMBS bondholders.
A CMBS, or Commercial Mortgage Backed Security, consists of a group of commercial property loans that have been pooled together and securitized, in order to be sold to investors. These securities are broken into various layers, or tranches, each of which has a different level of credit quality, carries a different amount of risk, and offers a different return for investors.
In the first quarter of 2019, a variety of trends and events have impacted the state of CMBS and conduit financing in the United States. Looking back at the 2018 year, while overall commercial loan transaction volume was up, CMBS issuances fell approximately 12%, to just under $77 billion. Overall, CMBS delinquency rates rose slightly, and, experts believe that troubled retail properties, including shopping malls, may be in for additional trouble if they cannot find a lender willing to refinance their debt.
If you own a branded hotel or hotel franchise, you may be interested in participating in your franchise’s property improvement plan (PIP). Property improvement plans are typically required in order to bring a hotel in line with the franchise’s latest design standards, and in some cases, are mandatory, especially if a franchisee wants to expand their hotel or purchase a new franchise location.
CMBX indexes track the market for CMBS (commercial mortgage backed securities), securities that themselves are backed by CMBS loans. CMBX indexes are an invaluable tool for investors who want to invest in CMBS, but they can also reveal important trends for commercial real estate borrowers who are considering taking out CMBS financing.
Just like asset backed securities and mortgage backed securities (MBS), commercial mortgage backed securities (CMBS) are divided into tranches based on credit risk. The highest-rated, least risky loans will be placed in the highest tranches, while the lowest-rated, riskiest loans will be placed in the lowest tranches.