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Commercial Mortgage-Backed Securities
Must be in APA format with references and free of AI text.
Not specific word limit( 600-900) words
This assignment will be submitted to Turnitin™.Instructions
Commercial Mortgage-backed Backed Securities play an important role in the secondary market. However, securities based on commercial loans are often neglected due to the more popular residential mortgage securities. Research the history of commercial mortgage-backed securities and their role within the secondary market. In this week’s case analysis, address the following questions:
- Why were commercial mortgage-backed securities created? What void within the market did their creation fulfill?
- Provide an overview of how commercial mortgage-backed securities are pooled, bought, and sold to the investor.
- How do the risks associated with commercial-backed securities compare to residential mortgaged back securities? In your opinion, which type of securities is higher risk and why?
Your case analysis must conform to the assignment expectations and is due by 11:59 pm CT on Sunday.
History and Role of Commercial Mortgage-Backed Securities in the Secondary Market
(CMBS) are a type of mortgage-backed security that emerged in the financial markets to address specific needs within the commercial real estate financing industry. While residential mortgage-backed securities (RMBS) gained popularity, CMBS, though less prominent, have played an essential role in the secondary market. Their development filled a crucial void by providing liquidity to commercial real estate investments, allowing lenders to redistribute risk, and offering investors diversified income streams. In this analysis, the history and role of CMBS in the secondary market will be discussed, along with the pooling and selling process of these securities. Additionally, the risks associated with CMBS and RMBS will be compared.
Creation and Purpose of Commercial Mortgage-Backed Securities
CMBS were created primarily to improve liquidity and distribute risk within the commercial real estate market. Before the creation of CMBS, lenders bore significant risk when offering loans to commercial entities. Unlike residential loans, which are typically smaller and more homogenous, commercial loans are often large and tied to income-generating properties such as office buildings, hotels, and shopping centers. These loans can be riskier due to their dependence on business revenues, and lenders faced challenges in mitigating this risk.
The creation of CMBS filled a significant void in the market by enabling lenders to sell off their commercial loans and reduce their exposure to these risks. This process also allowed for increased lending, as financial institutions were not restricted by capital limitations when holding loans on their balance sheets. By pooling commercial mortgages and issuing securities backed by those loans, lenders were able to spread risk among a broader range of investors while also providing investors access to a diversified portfolio of income-producing commercial properties (Bhardwaj & Sengupta, 2008). Furthermore, the introduction of CMBS allowed institutional investors like pension funds and insurance companies to access commercial real estate investments without directly acquiring properties.
Pooling, Buying, and Selling of CMBS
The process of pooling, buying, and selling CMBS follows a structured mechanism. First, a commercial lender issues loans to commercial real estate borrowers. These loans are then sold to a trust or a special purpose vehicle (SPV) that pools the loans into a…