Commercial mortgage-backed security – CMBS – An asset-backed security (ABS) on which payments of principal an
d interest are made to the holders from revenue generated (backed) by an underlying pool of commercial mortgage loans. The underlying commercial mortgages are pledged to the holders of the securities as collateral for the payment by the issuer of principal and interest on the securities. Commercial mortgage-backed securities are most commonly issued by a special purpose entity as part of a securitisation or structured finance transaction.
Complementary to CMBS are: Residential mortgage backed security (RMBS) – An asset-backed security (ABS) on which payments of principal and interest are backed by mortgages for the purchase of residential real estate. Includes ‘prime’ mortgages, where borrowers have strong credit histories, ‘buy to let’ mortgages, or ‘non-conforming’ mortgages.
A mortgage-backed security in which the mortgages on commercial building, offices, factories, apartments, and other buildings other than single-family homes collateralise the security. Unlike most other mortgage-backed securities, the structure of a CMBS is not standardised and as a result, it is difficult to assess its risk. It is also called a collateralised mortgage-backed security.
When you get a traditional commercial real estate loan, you approach a lender, receive funds and pay the loan back to the lender over the course of several years. However, when you get a conduit loan, the loan will be packaged
with other commercial mortgages into a trust, known as a Real Estate Mortgage Investment Conduit (REMIC), and sold on a secondary market to investors. This is a process known as securitisation, and this is why these loans are also referred to as commercial mortgage-backed security loans. After your loan is sold to investors, this will change some aspects of how the loan will be administered and who you will deal with when making payments or changing the loan.
Most conduit loans have a balloon payment at the end of a five or 10 year term. However, the monthly payments follow a 20 or 30 year amortisation period. This means that the monthly payment will be equal to what you would pay if the loan had a 20 or 30 year term, but you will pay off the loan in five or 10 years instead. The last payment on the loan will be the balloon payment where you pay back the remaining principal and interest.
Types of securities
| Security name | Description |
| A residential mortgage-backed security (RMBS) | Backed by mortgages for the purchase of a residential real estate. Includes ‘prime’ mortgages, where borrowers have strong credit histories, ‘buy to let’ mortgages, or ‘non-conforming’ mortgages. |
| A commercial mortgage-backed security (CMBS) | Backed by mortgages for the purchase of a commercial property. |
| Consumer asset-backed security (Consumer ABS) | Backed by personal financial assets such as auto loans, credit cards, student loans, and other consumer loans. |
| A corporate asset-backed security (Corporate ABS) | Backed by the cash flows from receivables such as leases on aircraft or other corporate equipment, small and medium enterprise (SME) loans, trade receivables. Also includes ‘whole business’ securities (WBS) based on the cash flows of an entire business unit, such as franchise or brand royalties. |
| Collateralised debt obligation (CDO) | Backed by a mixture of loans/receivables and/or asset-backed securities. Also includes ‘collateralised loan obligations’ (CLO) backed by loans, often to medium-sized corporates. |
Commercial mortgage-backed security
Most conduit loans have a balloon payment at the end of a five or 10 year term. However, the monthly payments follow a 20 or 30 year amortisation period. This means that the monthly payment will be equal to what you would pay if the loan had a 20 or 30 year term, but you will pay off the loan in five or 10 years instead. The last payment on the loan will be the balloon payment where you pay back the remaining principal and interest.e-backed security (CMBS) Commercial mortgage-backed security (CMBS)
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