Commercial Mortgage-Backed Securities (CMBS)

Loading the player...

What are 'Commercial Mortgage-Backed Securities (CMBS)'

Commercial mortgage-backed securities (CMBS) are a type of mortgage-backed security that is secured by mortgages on commercial properties, instead of residential real estate. A CMBS can provide liquidity to real estate investors and to commercial lenders. As with other types of MBS, the increased use of CMBS can be attributable to the rapid rise in real estate prices over the years.

BREAKING DOWN 'Commercial Mortgage-Backed Securities (CMBS)'

Because CMBS are not standardized, there are a lot of details associated with them that makes their valuation difficult. However, when compared to a residential mortgage-backed security (RMBS), a CMBS provides a lower degree of prepayment risk because commercial mortgages are most often set for a fixed term.

CMBS Structure

The underlying loans that get securitized into CMBS include loans for properties such as apartment complexes and buildings, factories, hotels, office buildings and shopping malls. CMBSs are a group of commercial loans on these property types that are bucketed into various tranches. Though these securities are customized, generally they have three or four tranches. Tranches are typically ranked from senior, or highest quality, to lower quality. The highest quality tranches will receive both interest and principal payments and generally have the lowest risk. The securities are structured so as the tranches go down in rank, they take on more risk and are designed to absorb most of the potential losses that can occur over the life of the security. The lowest tranche in a CMBS's structure will contain the riskiest loans of the portfolio and possibly speculative loans. This securitization process is important for both banks and investors. It allows banks to issues more loans in total, and it gives investors easy access to commercial real estate while giving them more yield than traditional government bonds. Typically, only very wealthy investors invest in CMBS because there aren't many options for the average investors. Though many real estate mutual funds invest a portion of their portfolio into CMBS, it is difficult to find any mutual funds or exchange-traded funds that solely invest in the asset class. The CMBS market accounts for approximately 2% of the total U.S. fixed-income market.

CMBS Participants

CMBSs are complex securities and require a wide range of market participants. Among some of the entities involved with CMBS are the investors, primary servicer, master servicer, special servicer, directing certificate holder, trustees and rating agencies. Each of these market participants has a different role that ensures the CMBSs function properly.

RELATED TERMS
  1. Commercial Real Estate Loan

    definition of a commercial real estate loan
  2. Asset-Backed Security - ABS

    A financial security backed by a loan, lease or receivables against ...
  3. Tranches

    A piece, portion or slice of a deal or structured financing. ...
  4. Real Estate

    Land plus anything on it, including buildings and natural resources.
  5. Sequential Pay CMO

    A type of collateralized mortgage obligation (CMO) in which there ...
  6. Residential Mortgage-Backed Security ...

    A type of security whose cash flows come from residential debt ...
Related Articles
  1. Investing

    What are Tranches?

    Tranches often describe specific classes of bonds within a security that hold different degrees of risks and maturities.
  2. Managing Wealth

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  3. Managing Wealth

    Find Fortune In Commercial Real Estate

    Investing in big buildings means big money - and bigger risks.
  4. Personal Finance

    Commercial Real Estate: How to Invest Like a Pro

    Investing in commercial real estate can add stability to your portfolio. Here's how to do it.
  5. Financial Advisor

    How To Become a Mortgage-Backed Securities Analyst

    Specializing in structured or derivative credit products like mortgage-backed securities requires education and prior experience in the mortgage field.
  6. Personal Finance

    7 Steps To A Hot Commercial Real Estate Deal

    For savvy real estate investors, times of lower prices reveal investment opportunity.
  7. Personal Finance

    The Reality of Commercial Real Estate Loans

    It’s corporations and partnerships that most commonly take out commercial real estate loans.
  8. Investing

    Exploring Real Estate Investments: Buying And Owning Real Estate

    By Ian Woychuk, CFA In Chapter 2, we presented the investment selection matrix, which outlines your alternatives when choosing the kind of real estate investment to make. You can choose to invest ...
  9. Investing

    Why Are Mortgage Rates Increasing?

    Learn how the secondary mortgage market and investor demand affect the cost of home ownership.
  10. Investing

    Understanding Real Estate

    Real estate is an encompassing term that refers to land, the buildings on that land, and its natural resources, such as crops and minerals.
RELATED FAQS
  1. Who bears the risk of bad debts in securitization?

    Bad debts arise when borrowers default on their loans. This is one of the primary risks associated with securitized assets, ... Read Answer >>
  2. What's the difference between a collateralized mortgage obligation (CMO) and a mortgage-backed ...

    Find out more about collateralized mortgage obligations and mortgage-backed securities and the difference between the two ... Read Answer >>
  3. What is a tranche?

    "Tranche" is actually a French word meaning "slice" or "portion". In the world of investing, it is used to describe a security ... Read Answer >>
  4. What's the difference between a collateralized debt obligation (CDO) and a collateralized ...

    Find out how a collateralized mortgage obligation (CMO) is similar to a collateralized debt obligation (CDO), as well as ... Read Answer >>
  5. Why do banks securitize some debts, and how do they sell them to investors?

    Learn how and why banks securitize debt, how the securitized debt is sold to other investors, and how different the different ... Read Answer >>
  6. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center