CMBS Securitization: A Primer
When a conduit lender issues a CMBS loan, they will pool it in with a variety of other loans in order to create a commercial mortgage backed security (CMBS). These CMBS are similar to bonds, in the sense that they are traded on the open market. From an investing standpoint, CMBS are often compared to RMBS (residential mortgage backed securities), which are securities based on residential mortgage loans.
Much like RMBS, commercial mortgage backed securities are divided into tranches, each which involves loans of a different credit quality/risk. Lower risk tranches will be paid first in the case of a loan default, while higher-risk tranches are paid later. Most conduit lenders have between 3 and 8 securitizations per year, but this can vary greatly based on the size of the lender and the size of the loans they issue.
Single-Asset, Single Borrower (SASB) Loans Generally Consist of One, Securitized Loan
While most kinds of CMBS are created from many loans that are packaged together, Single-Asset, Single Borrower (SASB) CMBS consists of a very large loan on one property. In general, this will be a very high-quality (class A) property in a top MSA. SASB CMBS loans are typically $250 million to $1 billion. In some situations, SASB loans/securities can consist of a group of cross-collateralized, cross-defaulted properties owned by the same borrower.
CMBS Servicing and Securitization
After a CMBS loan is sold on the secondary market, it is typically switched to a loan servicing company. This does not typically provide an ideal experience for the borrower, as the servicing company’s priorities may not be fully aligned with the borrower’s. Issues may crop up in situations involving prepayment penalties (servicers are not particularly flexible), as well as issues involving loan repayment. Unlike loans which are held and serviced by a lender, it can be very difficult for a borrower to get financial assistance (such as a commercial loan forbearance) that can prevent a potential loan default.