Finance - Commercial Mortgage Backed Securities

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Introduction
CBMS or “Commercial Mortgage Backed Securities” is a unique type of commercial
mortgages backed security other than residential real estate backed securities. This can be
classified as unique products with fixed income investment which are backed by commercial
properties mortgages other than residential properties backed. CBMS can be considered as an
effective tool that provides liquidity to commercial lenders as well as real estate investors.
There are no standardized rules and regulations that are applicable for equalizing the
structures of CMBS and owing to this, proper and accurate valuations of CMBS are a bit
difficult (Ambrose, Sanders and Yavas 2016). There are numerous commercial mortgages
relating to wide range of property types, values and varying terms that forms the part of
CMBS like Commercial real estate, multi-family dwellings and many more. Investors like to
invest in CMBS rather than RMBS owing to existence of lower pre-payment risk.
Description
From the above study, it can be said that CMBS are securities with fixed income
which is backed by REIT or “Real Estate Investment Trusts”, Institutional investors, and
commercial real estate loans. These loans are basically used to finance buying of properties
of commercial nature only. CMBS works in an easy but effective manner. Firstly, a lender of
commercial nature like investment or commercial banks lends the required funds needed to
purchase the property. Secondly, the purchased would be used as a collateral for the above
loan issued (An and Pivo 2020). This process is quite similar to house property loans where a
purchased or built house property acts as a collateral to the aforesaid house property loan.
The aforesaid loan are used for numerous types of commercial properties like hotels, retail
stores, apartment buildings, offices, hospitals, industrial properties and many more. The loan
provided by the aforesaid investors or lenders, is sold to a trust where such funds are pooled

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and accumulated with all other loans of commercial nature. Finally, a number of bonds are
issued from such pooled trust. Now, the income to the investors or lenders of such funds is
generated through this trust in the form of rent. The occupants of the properties pays rent to
the trust and the trust forwards such rental income to the lenders of pooled funds. Therefore
this is CMBS that provides these investors to invest in commercial properties and gain
exposure in these diversified securitized products (Baghai and Becker 2020). This reduces the
risk for these investors which would have been existent if they would have invested directly
in real estate properties. It can be better understood with the help of a chart depicting the type
of properties where such pooled funds can be invested thereby generating rental income for
its investors. All data are taken as on December 1, 2016.
Property type breakdown
(Source: Baghai and Becker 2017)
The structure of Commercial loans are different from the residential mortgages. In the
case of residential mortgages, the monthly payments are more or less same where there are
varying amounts of principal and interest in the EMI over the course of such mortgage. The