The Difficulties in Refinancing the CMBS Debt

Market watchers have a lot of anxiety regarding the maturity of loan debt used in securing mortgage-backed securities (CMBS). With the constant rise in property value and the convenience of accessing capital, the loans are expected to pay off once they mature.

last updated Monday, December 4, 2023
#Refinancing plan #Mortgage Backed Security

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John Burson

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What is CMBS debt?

CMBS debt is a financing technique that involves merging commercial real estate mortgages into securities and selling them as bonds to investors. Investors receive payment from the underlying mortgages, which provide them with returns. The structure of CMBS includes different risk tranches, which determine the amount of risk for investors. While CMBS raises capital for real estate lenders, it also carries risks associated with the performance of the properties and broader economic conditions.

What Are Commercial Mortgage-Backed Securities?

Commercial Mortgage-Backed Securities (CMBS) are investment products that provide liquidity to real estate investors and commercial lenders. Unlike Residential Mortgage-Backed Securities (RMBS), CMBS are backed by mortgages on commercial properties, such as multi-family dwellings and commercial real estate. 

While no standardized rules for structuring CMBS, they are generally considered less risky than RMBS. This is due to their fixed terms, which offer less pre-payment risk.

The concern became evident when approaching the first quarter of 2024, and by September of the same year, the CMBS maturing loans payoff rate was at 75.6%. Almost 24% didn't make it to the cut, with the Morningstar credit rating projecting an average yearly payoff between 70 and 75 percent.

Developing a streamlined refinancing plan

It's easier for most people in commercial real estate to believe that with a creatively designed debt instrument serving as a refinancing tool, their loans would quickly pay off at maturity. It can be the only way of refinancing the current debt. There is a debt yield of 8 percent for maturing loans with LVT of 80 percent, which represents 51 percent of the remaining maturities, and it's high time for borrowers to find refinancing suitable to pay their loans.

The borderline options

A well-structured high-LVT debt instrument can be helpful in CMBS loans with an LVT of between 80 to 85 percent. High financing is short-term, expensive, and can be projected on clients with appreciating properties. For loans with LVT of 85 to 100 percent, homeowners should consider whether the year extension will provide a payoff or if they are worth keeping.

Beyond Salvation

Loans with an LVT of 100 percent are under the complex categories, representing about 30 percent of loans maturing in 2016. There is also no debt financing to curb such deals, and a sale won't work unless a seller pays more. A term extension would be considered if the loan is cut considerably, but the option here is for homeowners to release the property to a trust.

The mortgage brokers must understand the options available for property owners with CMBS loans higher than the lending market rate before the loan's maturity date unless the owner is ready to invest a lot of capital to pay the existing loan.

 
 
 

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