Mortgage Backed Securities Final Exam 2023 with
complete solution
Why is prepayment less of an issue with commercial loans than it is with home
mortgage loans?
Explain Yield Maintenance & Defeasance prepayment restrictions.
1) Commercial loans have strong call protections and penalties to the borrow if they
prepay the loan. Home loans do not have prepayment penalties.
Yield Maintenance Penalty - Present Value of lost payments will be paid to the lender to
maintain their expected yield
Defeasance - lost payments from prepayment are replaced with US Treasuries
Tranche
A pool of mortgages are broken up into different rating classifications. Slice or portion
Master Servicer
1) Services all the loans in the pool
2) Manages the flow of information in the mortgage pool
3) Can modify terms of the loan according to the PSA
Handles the day to day activities and oversees primary servicers
Special Servicer
1) Steps in if the loan defaults
2) Responsible for handling the B Piece
Operating Advisor
1) Advocate for the investment grade bondholder
2) Monitors and evaluates the special servicer performance under the PSA
Pooling and Servicing Agreement (PSA)
A legal contract defining the responsibilities and the obligations of the master and
special servicers in managing a CMBS transaction
REMIC
Real estate mortgage investment conduit (REMIC)
- special purpose vehicle (SPV)
- an entity used to pool Mortgage loans and MBS
Defeasance
1) A method for reducing the fees required when a borrower decides to prepay a fixed-
rate commercial real estate loan
2) Lost lender cash flows are replicated by US Treasuries
Yield Maintenance
-A type of prepayment penalty
- The borrower must pay the remaining balance plus a lump sum that represents the
lost interest to the lender
Lock Out Period
, A loan cannot be prepaid for a fixed amount of time
Pari Passu
- Meaning "Equal footing"
- All the bond holders have equal rights to the payment or equal seniority
Notional Balance
The remaining principal balance on a loan after the interest payments have been
stripped
"Hair Cut"
- Bond issuers project future cash flows
- But rating agencies always "haircut" (reduce) the estimated cash flows a bit to be more
conservative when valuing bonds
Mezzanine tranches (Ratings)
AA through BBB- are Mezzanine Tranches
Super Senior (Support Level)
Top Triple AAA class
Mezzanine Senior (Support Level)
AAA Tranche, below super senior
Junior Senior (Support Level)
Lowest Triple AAA Tranche
Conduit
A real estate mortgage investment conduits (REMIC)
- Hold hold commercial and residential mortgages in a trust
- Are responsible for issuing MBS
Fusion
Fusing conduit and large loans together
20. In the Post Great Recession CMBS, there is a new party called the operating
advisor. Why was this new position created? What does the operating Advisor
do?
Operating Advisor Role
1) Advocate for the investment grade bondholder
2) Monitors and evaluates the special servicer performance under the PSA
3) The role was created to deal with the perception that some Special Servicers took
actions that benefited them as holders of the B-piece but at the expense of the top rated
bond classes. In certain situations the OA might wield great power over the Special
Servicer. However, they are paid only a modest amount, - less than $50,000 annually
on a one billion dollar plus CMBS pool. Therefore, some people in the CMBS industry
do not feel they will have the resources to exert a significant influence on the operation
of the trust.
21. Contrast the risk analysis suggested in the CMBS Primer, Ch 5.1, for AAA
tranches and the risk analysis suggested in Ch 5.2 for mezzanine tranches.
1) In 2012, roughly 80% of bonds were rated as AAA. In 2007, roughly 88% of bonds
were rated as AAA. Prior to the Great Recession many bonds were given ratings they
didn't deserve.
complete solution
Why is prepayment less of an issue with commercial loans than it is with home
mortgage loans?
Explain Yield Maintenance & Defeasance prepayment restrictions.
1) Commercial loans have strong call protections and penalties to the borrow if they
prepay the loan. Home loans do not have prepayment penalties.
Yield Maintenance Penalty - Present Value of lost payments will be paid to the lender to
maintain their expected yield
Defeasance - lost payments from prepayment are replaced with US Treasuries
Tranche
A pool of mortgages are broken up into different rating classifications. Slice or portion
Master Servicer
1) Services all the loans in the pool
2) Manages the flow of information in the mortgage pool
3) Can modify terms of the loan according to the PSA
Handles the day to day activities and oversees primary servicers
Special Servicer
1) Steps in if the loan defaults
2) Responsible for handling the B Piece
Operating Advisor
1) Advocate for the investment grade bondholder
2) Monitors and evaluates the special servicer performance under the PSA
Pooling and Servicing Agreement (PSA)
A legal contract defining the responsibilities and the obligations of the master and
special servicers in managing a CMBS transaction
REMIC
Real estate mortgage investment conduit (REMIC)
- special purpose vehicle (SPV)
- an entity used to pool Mortgage loans and MBS
Defeasance
1) A method for reducing the fees required when a borrower decides to prepay a fixed-
rate commercial real estate loan
2) Lost lender cash flows are replicated by US Treasuries
Yield Maintenance
-A type of prepayment penalty
- The borrower must pay the remaining balance plus a lump sum that represents the
lost interest to the lender
Lock Out Period
, A loan cannot be prepaid for a fixed amount of time
Pari Passu
- Meaning "Equal footing"
- All the bond holders have equal rights to the payment or equal seniority
Notional Balance
The remaining principal balance on a loan after the interest payments have been
stripped
"Hair Cut"
- Bond issuers project future cash flows
- But rating agencies always "haircut" (reduce) the estimated cash flows a bit to be more
conservative when valuing bonds
Mezzanine tranches (Ratings)
AA through BBB- are Mezzanine Tranches
Super Senior (Support Level)
Top Triple AAA class
Mezzanine Senior (Support Level)
AAA Tranche, below super senior
Junior Senior (Support Level)
Lowest Triple AAA Tranche
Conduit
A real estate mortgage investment conduits (REMIC)
- Hold hold commercial and residential mortgages in a trust
- Are responsible for issuing MBS
Fusion
Fusing conduit and large loans together
20. In the Post Great Recession CMBS, there is a new party called the operating
advisor. Why was this new position created? What does the operating Advisor
do?
Operating Advisor Role
1) Advocate for the investment grade bondholder
2) Monitors and evaluates the special servicer performance under the PSA
3) The role was created to deal with the perception that some Special Servicers took
actions that benefited them as holders of the B-piece but at the expense of the top rated
bond classes. In certain situations the OA might wield great power over the Special
Servicer. However, they are paid only a modest amount, - less than $50,000 annually
on a one billion dollar plus CMBS pool. Therefore, some people in the CMBS industry
do not feel they will have the resources to exert a significant influence on the operation
of the trust.
21. Contrast the risk analysis suggested in the CMBS Primer, Ch 5.1, for AAA
tranches and the risk analysis suggested in Ch 5.2 for mezzanine tranches.
1) In 2012, roughly 80% of bonds were rated as AAA. In 2007, roughly 88% of bonds
were rated as AAA. Prior to the Great Recession many bonds were given ratings they
didn't deserve.
