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 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.

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 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. As of December 2016, the SEC and FINRA have introduced new regulations that mitigate the risk of these securities by creating margin requirements for covered agency transactions including collateralized mortgage obligations.

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

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. Commercial Real Estate

    Property that is used solely for business purposes. Examples ...
  4. Collateralized Loan Obligation ...

    A security backed by a pool of debt, often low-rated corporate ...
  5. Active Tranche

    A tranche of a collateralized mortgage obligation (CMO) that ...
  6. Pro-Rata Tranche

    A portion of a syndicated loan that is made up of a revolving ...
Related Articles
  1. Investing

    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.
  2. Investing

    Find Fortune In Commercial Real Estate

    Investing in big buildings means big money - and bigger risks.
  3. Investing

    Fund Managers Rush to Buy Real Estate Debt

    As commercial real estate values plateau, fund managers are purchasing more real estate debt.
  4. Personal Finance

    Why Are Mortgage Rates Increasing?

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

    Commercial Real Estate Faces Strong Headwinds

    The good times may be coming to an end for the U.S. commercial real estate market as mortgage defaults rise and interest rates move upward.
  6. 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.
  7. Investing

    CMO vs CDO: Same Outside, Different Inside

    The concept of collateralizing and structured financing predates the market for collateralized mortgage obligations and collateralized debt obligations.
  8. Investing

    What is Securitization?

    Securitization is the process of converting an asset, or group of assets, into a marketable security. Often times, the securitized assets are divided into different layers, or tranches, tailored ...
  9. Personal Finance

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  10. Personal Finance

    CDOs and the Mortgage Market

    These structured products contribute to keeping borrowing rates low.
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. 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 >>
  4. What are the best ways to invest in mortgage-backed securities (MBS)?

    Find out how you can start investing in real estate through mortgage-backed securities. Read Answer >>
  5. How much of the global economy is comprised of the real estate sector?

    Find out how much of the global economy consists of the real estate sector, including output from commercial and residential ... Read Answer >>
Trading Center