Mortgage backed Securities, Bonds and Mutual Funds
Commercial mortgage backed securities or also known as CMBS are bonds, that are backed by commercial property such as apartments, retail shops and similar in structure as the collateralized mortgage obligation CMO is a special purpose entity that is wholly separate from the institution that create it by being the legal owner of a set of mortgages, which in this case will be commercial mortgages, called a pool. Investors in a CMO buy bonds issued by the entity, and receive payments according to a defined set of rules.
Commercial securities are called the collateral, the bonds are called tranches also known as classes, and the set of rules that dictates how money received from the collateral will be distributed is called the structure. The legal entity, collateral, and structure are collectively referred to as the deal. So the use of fixed income funds can be managed by a bond fund manager who will help you with less prepayment risk than other MBS types, thanks to the structure of commercial mortgages you will find that many often contain lockout provisions after which they can be subject to defeasance, yield maintenance and prepayment penalties to protect bondholders.
Investors choose which CMBS bonds to purchase based on the level of credit risk/yield/duration that they seek. Each month the interest received from all of the pooled loans is paid to the investors, starting with those investors holding the highest rated bonds, until all accrued interest on those bonds is paid. Then interest is paid to the holders of the next highest rated bonds and so on. The same thing occurs with principal as payments are received.
Commercial mortgage backed securities are a package, and they include both low risk AAA rated bonds all the way down to high risk B rated bonds.
Facts about Securitized Commercial Mortgages
Delinquencies of securitized commercial mortgages may quadruple in the next 18 months to almost 4 percent, which has been projected by real estate hedge funds. It has been stated that about 70 percent of commercial mortgages are pooled into commercial mortgage-backed securities that are sold to investors, so with commercial loan rates based on spreads, or the difference between the amount of money CMBS promise to pay investors over what the 10-year Treasury bill will pay.
This has resulted in a sequential payment structure is generally referred to as the waterfall because there is a shortfall in contractual loan payments from the borrowers or as in 2008 that market dried up to the tune of 95% less securitized lending compared to 2007 the loan collateral is liquidated and does not generate sufficient proceeds to meet payments on all bond classes, the investors in the most subordinate bond class will incur a loss with further losses impacting more senior classes in reverse order of priority. Canada had $32 billion of Non Bank Asset-Backed Commercial Paper freeze when owners found out there was U.S. sub-prime mortgages and high risk credit default swap contracts within the trusts.
Canadian Asset-Backed Commercial Paper Restructuring
Risk of Investing in Asset Backed Securities
Other terms related to the asset management fixed income products would include:
Collateralized Mortgage Obligation
Commercial Paper Funding Facility
Fannie Mae Federal National Mortgage Association
Ginnie Mae Government National Mortgage Association
Mortgage-Backed Securities
Pass-Through Security
Real Estate Investment Trust
Temporary Lender
Vintage
Weighted Average Coupon
Real estate investors are looking for other ways to handle the current mortgage prepayment protection for the home foreclosure process the financial crisis and economic meltdown has hit rock bottom has caused investors to look into asset backed securities, An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets which typically is a group of small and liquid assets that are unable to be sold individually, so instead they are pooling the assets into financial instruments allowing them to be sold to general investors,
In a process called secularization, it keeps the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets. Some of the advantages include reducing the risk-weighted assets by freeing up capital, enabling them to originate still more loans such as common payments from credit cards, auto loans, and mortgage loans, to esoteric cash flows from aircraft leases, royalty payments and movie revenues.