How does a CMBS differ from residential MBS at the structural level?

Question

AcadiFi · Accepted Answer

CMBS pool large commercial real estate loans (CRE) on offices, retail, industrial, multifamily, hotels, and self-storage. Structural differences from RMBS:

1. Larger, fewer loans: a typical CMBS has 50-80 loans averaging $15M-$60M versus thousands of small residential loans.
2. Balloon maturity: CRE loans typically amortize on a 30-year schedule but balloon in 10 years — so the investor's key risk is refinancing, not prepayment.
3. Prepayment protection: yield maintenance or defeasance lockouts prevent voluntary prepay. This eliminates RMBS-style contraction risk almost entirely.
4. Credit analysis: loan-by-loan underwriting using DSCR (debt service coverage ratio), LTV (loan-to-value), property cash flow, tenant rosters, and market comps.
5. Special servicer: when loans default, a special servicer (e.g., LNR, Midland) takes control, negotiates workouts, or forecloses.

Tranche architecture mirrors RMBS but with different drivers:

- Super-senior (AAA), senior (AAA), mezzanine (AA-BBB), subordinate (BB-B), and unrated 'B-piece'.
- Sequential-pay principal; interest paid pro-rata until triggers.
- Losses absorbed bottom-up (B-piece first).

```mermaid
flowchart TB
  Loans[50-80 CRE loans] --> Pool[CMBS trust]
  Pool --> AAA[Super senior AAA]
  Pool --> MEZ[Mezzanine]
  Pool --> BPC[B-piece]
  BPC -->|first loss| BPC
```

For FRM: CMBS investors worry about maturity defaults, tenant bankruptcies, sector shocks (office post-COVID), not prepayment speed.

How does a CMBS differ from residential MBS at the structural level?

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