Opening of Ace Hardwood Store. Loan provided by Commercial Loan Direct.
Written by Leane Eicoff| September 21, 2018
A Commercial Mortgage-Backed Securities (CMBS or conduit) mortgage is a fixed-rate, non-recourse loan product that uses flexible underwriting standards and larger commercial real estate properties as collateral. Several of these mortgages are pooled together, securitized into bonds, and sold to investors. However, this doesn"t affect the borrower; the loan is serviced similarly to any other loan product.
The financial institution that offers the loans to borrowers will initially fund the loans with its own money at closing, then pool the loans together and securitize them (i.e. turn them into bonds). The rating agencies (i.e. Moody"s, Fitch, Kroll, S&P, DBRS, and Morningstar) then rate the bonds in the pool from investment grade (AAA/Aaa through BBB-/Baa3) to below investment grade (BB+/Ba1 through B-/B3) with a subordinate, unrated class below the lowest rated bond class. These ratings are based upon the pool"s average LTV and DSCR, the distribution of the loans" LTVs and DSCRs, the property types in the pool, the properties" ages and lease expirations, the geographical location of properties, the various loan sizes, and total number of loans. After rated, the bonds are then sold to large investors for prices corresponding to the class of the bonds. Once the bonds are sold, the money the lender initially loaned to the borrowers is replenished, less an amount designated for risk retention, unless those strips are sold to "B-piece" buyers.
A pooling and service agreement (PSA) creates an established standard by outlining the responsibilities for each servicer. A Trustee is responsible for supervising the master and special servicers, ensuring that they act in accordance with the PSA. The Master Servicer is responsible for day-to-day loan operations including mortgage payments, escrow accounts, financial statements, site inspections, and consent requests. All sub-performing or non-performing mortgages are sent to special servicing. Special servicers are responsible for work-outs including extending maturity dates, restructuring loans, appointing receivers, foreclosures, and managing and selling the foreclosed real estate. Sometimes master servicers subcontract specific responsibilities to a primary or sub servicer in order to uphold the PSA when they need additional assistance.
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