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Commercial Real Estate Mortgage Securities

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Commercial Real Estate Mortgage Securities Powered By Docstoc
					            Overview of
Commercial Mortgage Backed Securities
             (CMBS)

           Presentation to
American College of Real Estate Lawyers

            March 18, 2004
• The CMBS Process

• Build -A- Bond

• The CMBS Market


                     2
The CMBS Process




                   3
                    Who The Players Are



                                               Securities                         Trustee/
                                                                    Investor
                                                                                Fiscal Agent



              Loan Originator/            Depositor (SPE)
Borrower        Loan Seller                    Issuer/
                                         Investment Banker




               Financial         Engineering                 Primary Servicer
  Appraisal                                                                       Rating
              Statements          Reports                    Master Servicer      Agency
                                                             Special Servicer




                                                                                               4
Who The Players Are: Post Securitization


                                   Investor                     Trustee/
                                                              Fiscal Agent




              Investment Bank/
                                                     Trust
              Secondary Trading




Borrower
                                  Primary Servicer
                                  Master Servicer            Rating
                                  Special Servicer           Agency




                                                                             5
                       Where the Money Goes
                   Assignment of Mortgage and Leases
                                                                        Lender

                                                           Mortgage
     Loans                                                                          Issuance
                                                           Collateral
                                                                                    Proceeds
                                             Debt Service
             Debt                           PLUS Advances            Trustee-
             Service       Servicer-
                                          LESS Servicing Fees      Distribution
Borrowers                  Collection
                            Account                                  Account

                                                       Debt Service                 Issuance
                                                       PLUS Draws on                Proceeds
                                                       External Credit
                                                       Enhancement
                                                                    Securities



                                                                        Investors
                                                                                               6
                                                       TRANSACTION TIMETABLE

               ACTIVITY                                            WEEK                              PARTICIPANTS


                                       1   2   3   4   5   6   7    8   9   10 11 12 13 14 15 16
Initial analysis                                                                                     LO, IB

Due diligence for securitization                                                                     LO, IB, SC

Structuring process                                                                                  LO, IB

B-buyer due diligence                                                                                LO, IB, BB

Rating agency review                                                                                 LO, IB, RA

Selection of servicer & trustee                                                                      LO, IB, SV

Legal documentation, both                                                                            ALL
private & public securities offering

Pre-marketing of securities                                                                          IB, Inv, RA

Marketing / pricing
  Private offering:                                                                                  IB, Inv, BB, RA
  Pricing of below-investment grade
  Public offering:                                                                                   IB, Inv, RA
  Pricing of investment grade

Closing of securities                                                                                ALL

LO Loan Originator                         SV Servicer             UC Underwriter's Counsel   Inv Investor             7
IB Investment Bank                         RA Rating Agency        SC Seller's Counsel        BB B-Piece Buyer
Build -A- Bond




                 8
       Hypothetical Structure: Credit Tranching

                                $85MM           Last     Lowest
                        Investment Grade CMBS   Loss     Risk
                               Aaa/AAA
                                 Aa/AA
                                  A/A
                               Baa2/BBB

    $100MM                    $11 MM
Pool of Mortgages          Non-Investment
                            Grade CMBS
                               Ba/BB
                                B/B


                               $4 MM
                            Unrated CMBS

                                                First   Highest
                                                Loss    Risk 9
                    Basic CMBS Structure
                 $100 MM, 5-Year, Fixed Rate

Class             Size    Rating     Coupon   Expected     Subordination
                                                 Life

Class A          $85 MM   Aa2 / AA    7.0%     3.6 years         15%


Class B          $11 MM   Ba2 / BB    8.2%     5.0 years          4%


Class C          $4 MM      NR                             “First Loss Piece”




NR = Not rated




                                                                                10
            Senior / Subordinated Structure
                     5 Year Security
        First                   Next           After
       3.6 years              1.4 years       5 years




P+ i    A                       A
                                                A




  i     B          P+ i         B
                                               B

  i                 i
        C                       C
                                          P    C

                                                    11
                          Basic CMBS Structure
                       $100 MM, 5-Year, Fixed Rate

Class               Size          Rating          Coupon       Expected          Subordination
                                                               Life
Class A           $85 MM         Aa2 / AA          7.0%          3.6 years            15% 1
Class B           $11 MM         Ba2 / BB          8.2%          5.0 years            4% 2
Class C           $4 MM             NR                                          “First Loss Piece”


1    Could be calculated as follows for Aa2-level stress:
             Foreclosure Frequency        X       Loss Severity =    Loss Coverage
                      30%                  X           50%      =
                      0.3                 X            0.5       =   0.15 or 15% cover age or subordination

2    Could be calculated as follows for Baa2-level stress:
             Foreclosure Frequency        X       Loss Severity =
                      20%                 X           20%       =
                      0.2                 X           0.2       =    0.04 or 4% coverage or subordination




                                                                                                              12
                    How To Decide How Much Subordination?
                              Loss Rate Scenarios

                             Default                               No Default
                             18.3%                                  81.7%




      Foreclosed                                                   Not Foreclosed
         46%                                                            54%


       Loss Rate                                                       Loss rate
         36%                                                             18%

Equally Weighted Portfolio Loss Rate =
           (0.36)(0.46)(0.183)                         +            (0.18)(0.54)(0.183)
                        0.030                          +                         0.018 = 0.048 or 4.8%

From: Mark P. Synderman. “Update on Commercial Mortgage Defaults. “The Real Estate Finance Journal.
Summer 1994.

Cumulative loss rates for about 11,000 commercial mortgages originated by eight
life insurance companies between 1972 and 1986.                                                          13
                Basic CMBS Structure
$100 MM, 5-Year, Fixed Rate with Interest Only Strip (IO)

  Class                Size             Rating        Coupon             Average               Subordination
                                                                           Life

  Class A-1          $85 MM            Aa2 / AA         6.1%               3.6 years                 15%



  Class A-2         Notional           Aa2 / AA         0.9%         Not meaningful



  Class B            $11 MM             Ba2 / BB        8.2%              5.0 years                   4%




  Class C            $4 MM                 NR                                                 “First Loss Piece”


 The INTEREST ONLY (IO) strip collects interest of 0.9%, or 90 bp on a NOTIONAL amount of $85 MM.
 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-2 total the coupon of Class A alone in the previous example; this would
  not necessarily always be true.
                                                                                                                   14
$100 Million CMBS: Hypothetical Tranche Structure


Rating     Size of Class   Subordination   Loss Severity X Loss Frequency   = Loss Coverage

Aaa/AAA      $70 MM            30%         60% X    50% =    0.60 X 0.50    = 0.30   = 30%
 Aa2/AA      $5 MM             25%         50% X    50% =    0.50 X 0.50    = 0.25   = 25%

  A2/A       $5 MM             20%         50% X     40% =   0.50 X 0.40    = 0.20   = 20%
Baa2/BBB     $5 MM             15%         39% X    39% =    0.39 X 0.39    = 0.15   = 15%


 Ba2/BB      $6 MM              9%         30% X    30% =    0.30 X 0.30    = 0.09   =   9%
  B2/B       $5 MM              4%         20% X    20% =    0.20 X 0.20    = 0.04   = 4%
   NR        $4 MM           First Loss                          NONE




                                                                                              15
$100 MM CMBS, 10-Year, Fixed Rate Classes Security
       Class             Size              Rating              Coupon              Spread at Issue                Average Life
                                                                                       (Yield)

         A-1           $35 MM            Aaa/AAA                 5.50%                +85 BP (PR)                      5 years
        A-2            $35 MM            Aaa/AAA                 6.55%                +90 BP (PR)                     10 years
          B            $5 MM               Aa2/AA                6.60%               +100 BP (par)                    10 years
          C            $5 MM                A2/A                 6.70%               +110 BP (par)                    10 years
          D            $5 MM             Baa2/BBB                7.00%               +160 BP (disc)                   10 years

          E            $6 MM               Ba2/BB                8.00%               +425 BP (disc)                   10 years
          F            $5 MM                B2/B                 8.00%               +950 BP (disc)                   10 years
          G            $4 MM                  NR                 8.00%


   Although senior classes will be sold at either a slight premium or at par, non-investment grade classes will be sold at a discount.
   Non-investment grade trenches are also likely to be a private placement rather than a publicly-sold issue.
                                                       If C < Y, then it is a discount bond.
                                                           If C = Y, then it is a par bond.
                                                        If C > Y, then it is premium bond.
   Assumptions:
      5-year Treasury = 4.6 %
      10-year Treasury = 5.6 %

                                                                                                                                         16
The CMBS Market




                  17
                           CMBS Issuance: Domestic and International
             $100
                                                                                                  $22.7
             $90                                                                                                  $20.8
                                                                                                          $28.7
             $80                                                            $0.6
             $70                                                                   $9.1
             $60                                                                          $12.1
$ Billions




             $50
                                                                     $3.6
             $40
             $30                                              $0.9
                                                $2.8                                                              $77.8
             $20                         $0.3          $1.1
                                  $0.0
             $10           $0.6
                    $1.4          $14.0 $17.2 $17.4 $15.7 $26.4 $36.8 $74.3 $56.6 $46.9 $67.1 $52.1
              $0    $3.4 $7.6
                     90   91       92     93    94      95     96     97     98     99    2000     01      02      03
                                            Domestic                               Non-US
                                                                                                                          18
                                          Issuance ($ Billions)




                                  0
                                      4
                                           8
                                                 12
                                                      16
                                                            20
                                                                  24
                                                                       28
                          88 1Q

                          89 1Q

                          90 1Q

                          91 1Q

                          92 1Q

                          92 1Q

                          94 1Q



     CMBS Issuance (L)
                          95 1Q

                          96 1Q

                          97 1Q

                          98 1Q

                          99 1Q

                          00 1Q
                                                                            CMBS Issuance and Interest Rates




                          01 1Q
     10-Yr Treasury (R)




                          02 1Q

                          03 1Q
                                  3
                                      4
                                           5
                                                 6
                                                      7
                                                            8
                                                                  9
                                                                       10




19




                                            Interest rates (%)
                         Multifamily Mortgage Securitization
             $600                                                                              45%

                                                                                               40%
             $500




                                                                                                      Share of total securitized
                                                                                               35%

             $400                                                                              30%
$ Billions




                                                                                               25%
             $300
                                                                                               20%

             $200                                                                              15%

                                                                                               10%
             $100
                                                                                               5%

              $0                                                                               0%
                    90   91   92   93   94   95       96   97    98    99 2000 01   02   3Q
                                                                                         03
              Multifamily Mortgages Outstanding (L)        Securitized (L)   Share of Total Securitized (R)


                                                                                                                                   20
                           Commercial Mortgage Securitization
             $1,500                                                                          20%




                                                                                                    Share of total securitized
             $1,200                                                                          16%
$ Billions




              $900                                                                           12%


              $600                                                                           8%


              $300                                                                           4%


                $0                                                                           0%
                      90   91   92   93   94   95   96    97   98    99 2000 01   02   3Q
                                                                                       03
             Commercial Mortgages Outstanding (L)        Securitized (L)    Share of Total Securitized (R)


                                                                                                                         21
                                  Single Family and Commercial/Multifamily Securitization

                        70%

                        60%

                        50%
Share of outstandings




                        40%

                        30%

                        20%                                     24.7%

                        10%

                        0%
                              1     3   5   7   9   11    13 15    17   19   21    23   25   27   29   31    33
                                                         (03)                                               (03)
                                                                   Years from base year
                         Commercial/Multifamily (year 1=1991)                     Single Family (year 1=1971)
                                                                                                                22
                                Market Size Comparisons

             600

                                                                             $496
             500                                               $466


             400
$ Billions




                                            $313
             300
                        $230

             200


             100


               0
                   REITs Market Cap    GE Market Cap      GNP of Australia   CMBS
                                      (largest in NYSE)    (16th largest)


                                                                                    23
                                  Market Size Comparisons

              8                                                                                8
                                                                              $7.1
              7                                                                                7

              6                                                                                6

              5                                                                                5
$ Trillions




                                                               $4.4
                                                 $3.9
              4                                                                                4
                                   $2.9
              3                                                                                3
                     $2.0
              2                                                                                2

              1                                                                                1

              0                                                                                0
                  All Comm +     Corporate   US Government SF Securities   SF Mortgages
                  MF Mortgages    Bonds        Securities
                                                                                          24

				
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