Commercial Mortgage-Backed Security CMBS Loans
Commercial Mortgage-Backed Security or CMBS Loans are mortgages secured by income-producing real estate purchased by investment banks such as Deutsche Bank, Cantor Fitzgerald, JP Morgan and other similar firms. The loans can be secured by any type of property but are usually backed by office, retail, hospitality, and multifamily properties. Individual mortgages are bundled into large portfolios which are rated by Standard & Poors, priced by the market, and sold to individual and institutional investors. Investors receive an interest rate which is the weighted average of the interest rates on the individual loans in the bundle, less mortgage servicing and fund fees.
A properly-structured and rated CMBS can provide investors with a strong rate of return and investors have the safety of a diverse pool of assets (both of type and geography) unlikely to create a default en massé. Unfortunately, credit default events in 2008-2010 all but destroyed the CMBS market. Credit defaults in CMBS pools during that period occurred largely because the quality of the securities were significantly over-rated by credit rating agencies, properties were poorly underwritten, and re-insurers who were the ultimate back-stop for these securities failed.
CMBS lenders are slowly returning to the market, albeit chastened by past events. Investment banks are making loans with substantially more conservative underwriting and higher interest rates. While personal recourse for monetary default is not a requirement, investment bankers are insisting on adequate reserves and strict underwriting.
CMBS Loan Terms
- Loan Amount
- Interest Rate
- Loan Term
- Loan-to-Value Ratio
- Debt Coverage Ratio
- Personal Liability
- Prepayment Penalty
- $5,000,000 minimum
- 10-year US Treasury plus premium
- 10 years
- 25 or 30 years
- 75% to 80%
- 1.25 or 1.30 to 1
- Reserves are required
- Typically non-recourse
- Yield maintenance or defeasance
Advantages of CMBS Loans
The biggest advantage of a CMBS execution is that of speed. Borrowers who apply for a CMBS loan with a complete application along with all of the required documentation can expect underwriting, commitment and closing within 60 days.
Obtaining CMBS Loans
Obtaining a CMBS or Conduit loan is not for the uninitiated. They are not easy to obtain and pitfalls abound throughout the entire borrowing process. CMBS loans are entirely unregulated. Unlike agency lenders and agency-licensed mortgage bankers, who are subject to regulatory agency oversight, Wall Street investment banks have no government oversight. Also, CMBS interest rates are more expensive than agency loans because they are unregulated and not tied to a structured formula. Instead CMBS interest rates are set by an investment bank’s loan committee who must set the interest rate on each individual mortgage in anticipation of a portfolio sale many months after the loan’s closing.
Guidance & Answers For Commercial Borrowers
Darach Advisors has placed CMBS loans for our clients totaling several hundred million dollars and agency loans totaling more than $2 billion. Loan volume like that coupled with the experience which comes from providing mortgage banking to the world’s most sophisticated investors for a third of a century positions Darach Advisors to expertly guide you through the CMBS loan process. Contact Darach Advisors today. One 2o minute phone call with us and you’ll clearly understand why Darach Advisors should place your next mortgage loan.