CREW Charlotte November 2016 Luncheon - Commercial Mortgage Back Securities (CMBS) Loans

November 9, 2016

Submitted by Virginia Luther and Nichole Kelley

What You Missed: Commercial Mortgage Back Securities (CMBS) Loans

Next month there is a new rule coming to the structure of CMBS loans.  But, how with this affect us?
CMBS loans are a type of mortgage-backed security backed by commercial mortgages rather than residential real estate.  CMBS tend to be more complex and volatile than residential mortgage-backed securities due to the unique nature of the underlying property assets.  CMBS are bonds created from pools of loans secured by commercial real estate mortgages; each pool of loans is aggregated into a single trust or securitization.  The securitizations are diversified by geography, property type, borrowers and tenant exposure.  Most of these loans have 10 year terms meaning there is a large group of loans that were originated in 2007 and are maturing in 2017. Now that commercial real estate is back up and interest rates are low, there is a healthy amount of capital available to invest.  80-85% of these loans that are maturing are able to refinance successfully.
Why might borrowers migrate to other sources other than CMBS loans?
1.      The market was artificially overstated and distorted in 2007
2.      Regulations are now making CBMS loans less cost effective
What happens when a borrower defaults and there is a foreclosure due to breach of contract?
-        A receiver comes in to stabilize the asset. Through utilization of the lender’s funds, the receiver reports directly on his/her progress to the court system. Loans rarely go back to the initial borrower and often have complicated maintenance structures, which makes the process of maintaining an asset challenging with layered approvals.
On December 24, 2016, Risk Retention occurs for CMBS loans. How does that impact borrowers?
-        Requires a 5% credit risk retention on the sponsor of the securities.
-        Positives: Everyone wants a good experience so sponsors work hard to keep those loans beneficial for all parties. Heavy regulations mean focus on security of all parties and keeps things honest (i.e. airlines, telecom, etc.)
-        Negative: Lose some competitive leverage due to the regulations. More regulations = more expense. Therefore, borrowers will likely pay a higher interest rate.
Does the election affect this?
-        It can. As government increases, so does its role in regulations. As well, change in power causes market volatility. If one party holds all the power, change can be more easily put into effect.


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