How does the securitization process work?
These mortgage loans are initially funded by the financial institution when the borrower goes to closing on the property. The lender will then pool several CMBS loans together and turn them into bonds. The bonds in the pool will be rated based on a mix of factors like their average loan amount, loan-to-value ratio, debt service coverage ratio, and the number of loans in the pool.
Once the bonds have been rated, they are sold to investors at a price based on their rating. After the bond has been sold, the lender who originally loaned the money to the borrower is repaid, minus a small percentage for risk retention. This gives the lender more capital to be able to fund additional loans.
What happens after the loan is sold?
After a loan has been sold, the borrower no longer works with their original lender. Instead, they will work with a dedicated CMBS servicer known as a master servicer. The master servicer will handle the day-to-day aspects of managing the loan, such as collecting payments and managing any escrow accounts.
In the event that you have trouble making payments on your CMBS loan and it goes into default, your loan will be given to another loan servicer known as a special servicer. The special servicer will work with you to modify the terms of your commercial loan, provided that the terms are still beneficial to the bond investors.
The advantages of CMBS loans
The main advantage of choosing a conduit loan is that these loans typically offer a better interest rate than a traditional commercial loan. They also usually offer a fixed-rate option, which can give you the ability to plan for your payments more effectively.
Additionally, CMBS loans are nonrecourse loans, which means that the buyer is not held personally responsible for paying the loan. However, some of these loans do have a clause stating that if you intentionally cause harm to the property, your CMBS lender, or your investors, you could be held liable.
Lastly, these loans are assumable, so if you decide to sell the property in the future, the buyer can take over your CMBS financing and your interest rate. However, be aware that most lenders do charge a fee for this service.