An Introduction To Commercial Mortgage Backed Securitie

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CMBS 101

• CMBS 101
• An Introduction To Commercial Mortgage Backed
  Securities (CMBS)
• Prepared by
• The Education/Research Committee of the
  Commercial Mortgage Securities Association

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• Joseph Franzetti, Citigroup Global Markets
• Gale Scott Standard Poors

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• The CMBS Process

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The Participants in a Securitization
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Securities
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3
3
2
3
1
7
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2 months (Loan Funding) 2 months (Bond Issuance)
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The Participants in a Securitization
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The Participants in a Securitization
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The Participants after the Securitization is
Completed
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Where the Money Goes
Assignments of Rents and Leases
Loan Proceeds
Mortgage Notes
Securities Sale Proceeds at Closing
Debt Service Escrows
Debt Service Less Servicer Fee Plus Advances
Monthly Bond Coupon Principal
Securities Sale Proceeds at Closing
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Transaction Timetable
Activity
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Build-A-Bond
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Hypothetical Structure Credit Tranching
Last Loss
Lowest Risk
85MMInvestment GradeCMBSAaa/AAA 9MMOther
Investment GradeAa2/AAA2/ABaa2/BBB 4MMNon-I
nvestmentGrade CMBSBa2/BBB2/B 2MMNon-Rated
CMBS
100MMPool of Mortgages
Loss Position
Credit Risk
Highest Risk
First Loss
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Basic CMBS Structure 100 MM, 10-Year, Fixed
Rate
NR Non-Rated
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Senior / Subordinated Structure 10 Year Security
First 9 years
After 9.5 years
After 9.75 years
After 10 years

A
MortgagePool
A
A
A
A
A
P i
B
B
B
B
i
C
C
C
C
D
D
D
D
i
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Basic CMBS Structure
Subordination could be calculated as follows
for Aaa/AAA level stress Foreclosure
Frequency X Loss Severity 30 X 50
.15 or 15 coverage or subordination
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Hypothetical Class Structure
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How To Decide How Much Subordination? Loss Rate
Scenarios
Equally Weighted Portfolio Loss Rate
(0.196)(0.55)(0.33) 0.0356

(0.196)(0.25)(.0165)
0.008
(0.196)(0.20)(0) 0

.0436 or 4.36
Source Morgan Stanley. Update Commercial
Mortgage Defaults 30 Years of History.
September 2004 (Cumulative loss rates for about
18,000 commercial mortgages originated by eight
life insurance companies between 1972 and 2002.)
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Basic CMBS Structure100 MM, 10-Year, Fixed Rate
with Interest Only Strip (IO)
1 For illustration purposes, the INTEREST ONLY
(IO) strip collects interest of 0.25, or 25 bp
on a NOTIONAL amount of 85MM. The notional
amount could be the same as the size of an
associated class or the size of the entire
security. Here, the interest on Classes A-1 and
A-X total the coupon of Class A alone in the
earlier example.
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Hypothetical Class Structure
IF Y lt C, then it is a premium bond (PR) IF Y
C, then it is a par bond (PAR) IF Y gt C, then it
is a discount bond (D)
Assumptions 5-year Treasury 4.4
10-year Treasury 4.5
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The CMBS Market
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Holders of Commercial Multifamily Mortgage
Loans626 billion of the 2.5 trillion U.S.
commercial and multifamily mortgage loans
outstanding are held as securities, a significant
increase since 1990
Source Federal Reserve, Flow of Funds
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CMBS Issuance U.S. and Non-U.S.( Billions)
Source Commercial Mortgage Alert.
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U.S. CMBS Issuance ( Billions)
Source Commercial Mortgage Alert US only,
non-agency, non-CDO.
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U.S. CMBS Issuance and Interest Rates
Source Commercial Mortgage Alert and Federal
Reserve
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Multifamily Mortgage Securitization
Source Federal Reserve, Flow of Funds
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Commercial Mortgage Securitization
Source Federal Reserve, Flow of Funds
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Single Family and Commercial/Multifamily
Securitization Market Penetration
59.6
23.7
Source Federal Reserve, Flow of Funds Date
through 2004, year 14 (CMBS) and year 34 (Single
Family)
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CMBS Issuance Shift from RTC to Conduits
Source Commercial Mortgage Alert RTC
Resolution Trust Company
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CMBS Spreads Over 10-Year Treasury Investment
Grade
Source Morgan Stanley
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CMBS Spreads Over 10-Year Treasury
Non-Investment Grade
Source Morgan Stanley
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CMBS Spreads and Swap Spreads
Source Morgan Stanley
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Market Size Comparison(as of 12/31/04)
REITs Market Cap 1
Microsoft Market Cap (largest in NYSE) 2
GDP of Switzerland (17th largest) 3
Commercial and Multifamily Securitizations 4
Source (1) NAREIT (2) Microsoft Website (3)
World Bank (4) Federal Reserve, Flow of Funds
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Market Size Comparison(as of September 30, 2005)
US Government Securities
All Commercial Multifamily Mortgages
Single Family Mortgages
Single Family Securities
Corporate Bonds
Source Federal Reserve, Flow of Funds
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Investors of CMBS
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Who Buys CMBS?

• Institutional fixed income securities investors
  buy public bonds
• Real estate high yield investors buy private
  bonds
• Varies by class, by rating, by structure, by
  underlying collateral

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Investors of CMBS in 2004
Source Morgan Stanley
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Why?

• Yield differential (relative value investing)
• Credit performance
• Asset allocation (satisfy allocation to real
  estate debt)
• Non-correlated risks (compare to MBS and
  corporates)
• Comparative Credit Risk

Remember

• Credit Risk ? Yield

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Yield Differential(10-Year Sector Yield over
Treasury)
Source Merrill Lynch
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Credit Performance

• Maturity of markets
• Position in Asset Class
• Past performance is no guarantee of future success

Source FitchRatings
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Satisfying Asset Allocation to Real Estate Debt

• Risk based capital treatment for insurance
  companies gives advantage to CMBS
• Mortgages 3 Risk Based Capital (depending on
  insurers experience)
• Investment Grade Public Securities 0.3 Risk
  Based Capital
• Cost of management (direct loan vs. securities
  investment)
• Liquidity (ease of trading in and out of the
  portfolio)
• Creates diversified investment portfolio

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Non-Correlated Risks
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Investing in Non-Correlated Risks
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