{"id":2129,"date":"2019-09-12T13:33:00","date_gmt":"2019-09-12T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=2129"},"modified":"2026-01-21T16:29:18","modified_gmt":"2026-01-21T16:29:18","slug":"commercial-mortgage-backed-securities","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/commercial-mortgage-backed-securities\/","title":{"rendered":"Commercial Mortgage-backed Securities"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Desirable characteristics of a CMBS from a lender\u2019s perspective\",\n    \"text\": \"Which of the following characteristics are most desirable in a Commercial Mortgage-Backed Security (CMBS) from the point of view of a lender?\\n\\nA. A low loan-to-value ratio and a low debt-service-coverage ratio.\\n\\nB. A low loan-to-value ratio and a high debt-service-coverage ratio.\\n\\nC. A high loan-to-value ratio and a high debt-service-coverage ratio.\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"B. A low loan-to-value ratio and a high debt-service-coverage ratio.\\n\\nA lower loan-to-value ratio provides greater protection to the lender by increasing the borrower\u2019s equity cushion. A higher debt-service-coverage ratio indicates that the property\u2019s cash flows are sufficient to comfortably cover debt payments, reducing default risk.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"A. A low loan-to-value ratio and a low debt-service-coverage ratio.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"C. A high loan-to-value ratio and a high debt-service-coverage ratio.\"\n      }\n    ]\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Introduction to Asset-Backed Securities (2025 Level I CFA\u00ae Exam \u2013 Fixed Income \u2013 Module 4)\",\n  \"description\": \"This video lesson covers the fundamentals of securitization, exploring its benefits for economies and financial markets. It explains key concepts like credit and time tranching, mortgage-backed securities, prepayment risk, and collateralized debt obligations. The lesson also discusses commercial mortgage-backed securities, non-mortgage asset-backed securities, and covered bonds, highlighting their structures, cash flows, and risks.\",\n  \"uploadDate\": \"2022-05-24T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/9nVm9Qh4gKw\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=9nVm9Qh4gKw\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/9nVm9Qh4gKw\",\n  \"duration\": \"PT44M50S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/9nVm9Qh4gKw?si=MKBmLolIJtRCIh4w\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<p>Commercial Mortgage-Backed Securities (CMBS) are backed by a pool of commercial mortgages on income-generating properties such as multi-family properties (e.g., apartments), office buildings, industrial properties, shopping centers, hotels, and healthcare facilities.<\/p>\n<h2><strong>Credit Risk<\/strong><\/h2>\n<p>In the U.S. and other countries where commercial mortgages are non-recourse loans, the lender can only seize the income-generating property. The lender has no recourse to the borrower\u2019s other assets.<\/p>\n<p>Two key indicators of potential credit performance are the loan-to-value (LTV) ratio and the Debt-Service-Coverage (DSC) ratio. For example, if a lender buys a $1,000,000 property and makes a down payment of $200,000, the loan-to-value ratio will be $800,000\/$1,000,000 = 0.8. The lower the LTV, the more the lender is protected for recovering the loaned amount.<\/p>\n<p>The Debt-Service-Coverage (DSC) ratio is calculated as the net operating income generated by the property divided by the interest and principal repaid to the lender. A DSC exceeding 1 indicates that cash flows from the property are sufficient to cover the debt service.<\/p>\n<h2><strong>Structures of Commercial Mortgage-Backed Securities<\/strong><\/h2>\n<p>A credit-rating agency determines the\u00a0level of credit enhancement to achieve the desired credit rating. For instance, if specific LTV and DSC ratios cannot be met at the loan level, subordination could be used to achieve the desired credit rating.<\/p>\n<p>One of the major benefits of Commercial Mortgage-Backed Securities over Residential Mortgage-Backed Securities is the call protection feature, which protects investors against early prepayments. Four mechanisms offer a call protection at the loan level:<\/p>\n<ul>\n<li><strong>prepayment lockout<\/strong>: the minimum number of years in which the borrower cannot pay off the entire loan;<\/li>\n<li><strong>prepayment penalty points<\/strong>: predetermined penalties that must be paid by the borrower if the they wish to refinance;<\/li>\n<li><strong>yield-maintenance charge<\/strong>: in the event the borrower pays off a loan before maturity, it allows the lender to attain the same yield they would have attained had the borrower stuck to the original mortgage repayment schedule until maturity.<\/li>\n<li><strong>defeasance<\/strong>: a method for reducing the fees required when a borrower decides to prepay a fixed-rate commercial real estate loan. Instead of paying cash to the lender, the defeasance option allows the borrower to exchange another cash-flowing asset for the original collateral on the loan.<\/li>\n<\/ul>\n<p>Many commercial loans backing CMBS are balloon loans requiring a substantial principal repayment at maturity. If the borrower fails to repay, the lender could extend the loan with a higher default interest rate over a period called the workout period. Thus, the total default risk becomes a \u201cballoon risk.\u201d<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which of the following characteristics are most desirable in a Commercial Mortgage-Backed Secrurity from the point of view of a lender?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">A low loan-to-value ratio and a low debt-service-coverage ratio.<\/li>\n<li data-tadv-p=\"keep\">A low loan-to-value ratio and a high debt-service-coverage ratio.<\/li>\n<li data-tadv-p=\"keep\">A high loan-to-value ratio and a high debt-service-coverage ratio.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>B<\/strong>.<\/p>\n<p>The lower the loan-to-value ratio, the more the lender is protected for recovering the loaned amount. On the other hand, a debt-service-coverage ratio exceeding 1 indicates that cash flows from the property are sufficient to cover the debt service.<\/p>\n<\/blockquote>","protected":false},"excerpt":{"rendered":"<p>Commercial Mortgage-Backed Securities (CMBS) are backed by a pool of commercial mortgages on income-generating properties such as multi-family properties (e.g., apartments), office buildings, industrial properties, shopping centers, hotels, and healthcare facilities. Credit Risk In the U.S. and other countries where&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[9],"tags":[],"class_list":["post-2129","post","type-post","status-publish","format-standard","hentry","category-fixed-income","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Commercial Mortgage-Backed Securities | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn about CMBS, their structure, risk factors, and role in real estate financing through pooled commercial mortgages.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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