There are two kinds of commercial mortgage-backed bonds. The most popular kind is a standard conduit deal, known as a commercial mortgage-backed security ("CMBS"). A typical CMBS deal is a $6 million first mortgage on an attractive office building that is only 63% LTV in some primary market, like Washington, D.C. or New York City. Please click here if you need a CMBS loan.
A less-well-known kind of commercial mortgage-backed bond is an Asset-Backed Security (ABS) that happens to be backed by subprime commercial mortgages. You can think of these subprime commercial mortgages as less-than-perfect or hard money quality deals.
Each subprime commercial mortgage in the typical Asset-Backed Security portfolio has some sort of black hair. Maybe the lease is short term. Maybe the property has some vacancies. Maybe the LTV is higher than the 63% that most CMBS lenders will allow. Maybe the borrower has less-than-perfect credit. There will always be some black hair.
Now main characteristic about an ABS offering is that the lender will accept several different types of loans into the portfolio - typically scratch-and-dent residential loans, subprime commercial loans, car loans, and credit card loans. The theory behind an ABS offering is that the end bond investors enjoy more diversification. Not all of their investment is backed by car loans or commercial real estate loans. Maybe commercial real estate is depressed but car loans are paying like a slot machine.
Another important characteristic about ABS bonds is that they typically offer 2% to 2.5% higher yields than CMBS bonds. You find a number of subprime commercial lenders here.
Here's the point of this article: Yield-starved bond investors absolutely love bonds backed by commercial mortgages right now - even ABS bonds. This is very, very bullish for the future of commercial real estate lending ... and ultimately commercial real estate values.
