Whole Loans vs Securitized Loans (MBS, CMBS)

What is a Mortgage Backed Security?

It is important to take a moment to define the different segments of the market that we’re pursuing.

Mortgage Backed Securities make up a huge portion of the total real estate debt universe. There are some calculations that CMBS, or Commercial Mortgage Backed Securities made up some 70% of the commercial real estate debt written over the boom years.

Wikipedia does a great job of explaining mortgage-backed securities which I have republished here for your convenience:

"A mortgage-backed security (MBS) is an asset-backed security or debt obligation that represents a claim on the cash flows from mortgage loans, most commonly on residential property. [Not entirely true 70% of commercial real estate debt over the last 6 years was CMBS]"

"First, mortgage loans are purchased from banks, mortgage companies, and other originators. Then, these loans are assembled into pools. This is done by government agencies, government-sponsored enterprises, and private entities. Mortgage-backed securities represent claims on the principal and payments on the loans in the pool, through a process known as Securitization. These securities are usually sold as bonds, but financial innovation has created a variety of securities that derive their ultimate value from mortgage pools."

"Most MBSs are issued by the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises. Ginnie Mae, backed by the full faith and credit of the U.S. government, guarantees that investors receive timely payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U.S. government, have special authority to borrow from the U.S. Treasury. Some private institutions, such as brokerage firms, banks, and homebuilders, also securitize mortgages, known as “private-label” mortgage securities."

"Commercial mortgage-backed securities (CMBS) are secured by commercial and multifamily properties (such as apartment buildings, retail or office properties, hotels, schools, industrial properties and other commercial sites). The properties of these loans vary, with longer-term loans (5 years or longer) often being at fixed interest rates and having restrictions on prepayment, while shorter-term loans (1–3 years) are usually at variable rates and freely pre-payable."

CMBS vs Single Loan

Many of the residential loans you’re going to run across have been bundled and sold together as securities.

Many CMBS or commercial mortgage backed securities work the opposite way where a single loan or asset is divided into sections or tranches and then is invested in by a number of participants in that single asset.

I don’t teach anything here about CMBS. There are several reasons for this.

First, these are securities not whole loans. The structure and governance of these is complicated instruments involves a REMIC a Master Servicer, a Special Servicer, and so on.

The biggest complication with trying to penetrate this end of the market is the fact that this is an awful lot of property controlled by a very small pool of people and companies.

What are Whole Loans?

Your local, regional, and even national lenders make loans which they keep on their books. These are called ‘portfolio loans’.

These loans are generally serviced in-house and they are as the name suggests, whole. That is to say, they have not been cut up into tranches and sold to various investors. These are loans that sit on the bank's books, ideally, earning interest.

For most people, whole loans are where you should spend your time if your goal is to capitalize on the distressed real estate market today.

The governance, management, accessibility, etc of whole loans is infinitely less complicated than securitized loans, the decision makers are typically accessible, and there are plenty of problems to solve in whole loans.

Whole Loans vs Securitized Loans

With BankProspector we focus on helping you get access to the notes and REO that banks and credit unions sell. You should be focusing your prospecting efforts on whole loans from local regional and community lenders.

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