Some of the cheapest commercial mortgage money in the whole world comes from trusts. There are trillions and trillions of dollars currently invested in trusts.
For example, a wealthy dad might create a trust for his two minor children, where they receive a monthly income and the payment of their education for twenty-five years, until they reach the age of, say, 30 years old.
But here's the thing. The trust documents will often say that the trustee is only allowed to invest in bonds with a certain credit rating; e.g., BBB or better.
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Therefore, in order to invest in commercial real estate loans, those commercial loans - more precisely, the bonds backed by those commercial loans - must be rated by a bond rating agency, such as Standard & Poor's Global Ratings, Moody's, and Fitch Ratings.
The process of taking around 80 large commercial real estate loans - totaling, say $1.5 billion to $3 billion - and turning them into bonds that can be rated by a bond rating company is called securitization.
The bonds themselves are called commercial mortgage-backed securities ("CMBS"). The CMBS industry is huge, and it helps to provide permanent commercial loans, with rates not much higher than those offered by life insurance companies ("life companies"). Life companies offer the lowest interest rates in commercial real estate finance ("CREF") and get the safest, most desirable commercial loans.
Today's three-minute video lesson attempts to quickly explain the concept of a tranche. A tranche is a division or portion of a pool or whole. Think of a tranche as one of the pancakes in a tall stack of flapjacks.
Specifically, a tranche is an issue of bonds derived from a pooling of like obligations (such as securitized mortgage debt) that is differentiated from other issues, especially by maturity, rate of return, or risk.
Confused? This short video training lesson should help.
