Agency CMBS Loans Are Issued By GSEs, While Non-Agency CMBS Are Issued By Private Lenders
There are two types of commercial mortgage-backed securities (CMBS), agency CMBS, which consist of loans pooled by government-sponsored entities (GSEs) including Ginnie Mae, Fannie Mae, Freddie Mac, and non-agency (private) CMBS, which consist of loans pooled and securitized by private lenders, such as JP Morgan or Goldman Sachs.
Agency CMBS are generally securities backed by loans on multifamily and healthcare properties. In contrast, non-agency, or private CMBS can be backed by almost any type of commercial property, including traditional multifamily and healthcare, hospitality, industrial, retail, office, and mixed-use properties, among others. Another major difference is the fact that some agency CMBS are backed by the full faith and credit of the U.S. government or of their respective GSE, while non-agency CMBS are only backed by the collateral property of the constituent loans.
Depending on how one defines CMBS, some institutions consider Small Business Administration (SBA) securities such as SBA 7(a) Pools, SBA DCPCs (CDC/504), and SBIC Debentures to also fall under the definition of agency CMBS.
It should be noted that agency CMBS is also substantially different from agency RMBS (residential mortgage-backed securities), which are mortgage-backed securities collateralized by loans on single-family properties and properties between 2-4 units. One of the main differences between agency CMBS and agency RMBS is the enhanced call protection that agency CMBS provides to investors.
Overall, the agency CMBS market is significantly larger than the private CMBS market, considering the fact that Fannie Mae and Freddie Mac alone have issued around $150 billion in multifamily loans per year for the last few years, while the private CMBS market has hovered around $20 billion in issuances in recent years.
Both agency CMBS and non-agency CMBS are generally, but not always, structured as REMICs (real estate mortgage investment conduits), which are pass-through entities for tax purposes.
Most agency and non-agency commercial mortgage-backed securities are divided into tranches. The highest-rated tranches provide the lowest risk and highest returns, while the lowest-ranked tranches provide the highest risk level and the highest returns. In case of significant CMBS loan defaults, the highest-rated tranches are paid first, and the lower rated tranches are paid later, or sometimes not at all.
Some of the major agency CMBS types include:
Ginnie Mae Project Loan REMICs
Ginnie Mae Project Loan REMICs are agency CMBS backed by HUD/FHA multifamily loans, which generally have fixed-rate, fully-amortizing terms of between 35-40 years and often fund affordable housing projects. The average deal size since 2010 has been $325 million, with a range between $180 million to $780 million. Ginne Mae CMBS are backed by the full faith and credit of the U.S. government.
Fannie Mae DUS Megas, DUS REMICs
Fannie Mae DUS Megas and DUS REMICs are CMBS backed by Fannie Mae DUS (delegated underwriting and servicing) loans, mainly issued to multifamily and healthcare properties, with some loans funding affordable housing projects, student housing, and cooperative housing assets. These loans generally have a term of 10-years with 30-year amortizations. DUS Megas are single tranche CMBS, while DUS REMICs are multi-tranche. The average deal size since 2010 has been $77 million, with a range between $7 million and $315 million. Fannie Mae DUS Megas and DUS REMIC CMBS are backed by Fannie Mae, but not the U.S. government itself.
Freddie Mac K-Deals
Like Fannie Mae DUS Megas and DUS REMICs, Freddie Mac K-Deals are backed mainly by multifamily loans, with some loans financing student housing, affordable housing, healthcare, and cooperative housing properties. These loans also generally have terms of 10-years with 30-year amortizations. Since 2010, the average deal size has been $1.1 billion, with a range between $529 million and $1.25 billion. Freddie Mac K-Deal commercial mortgage-backed securities are backed by Freddie Mac, but, like Fannie Mae CMBS, are not backed directly by the U.S. government.
SBA 7(a) Pools
Unlike securities backed by Fannie Mae, Freddie Mac, or HUD multifamily loans, SBA 7(a) pools are backed by business loans guaranteed by the U.S. Small Business Administration (SBA) and provided by licensed private lenders. These loans are generally used for working capital, equipment, or refinancing existing debt. SBA 7(a) loans generally have floating interest rates and have terms between 5 and 25 years. They function as single-tranche pass-through entities. Since 2010, the average deal size has been $9 million with a range between $1 million to $75 million. Like Ginnie Mae bonds, SBA 7(a) pools are backed by the full faith and credit of the U.S. government.
SBA DCPC (Development Company Participation Certificates)
Like SBA 7(a) pools, SBA DPDCs (Development Company Participation Certificates) are backed by SBA-guaranteed small business loans, except for the fact that these are backed by loans issued through the SBA’s 504 loan program. The SBA 504 loan program is designed to finance the purchase, construction, or substantial rehabilitation of owner-occupied real estate and/or the purchase or upgrading of heavy equipment. These loans cannot be used for working capital. Loans are generally fixed-rate with 20 year terms for real estate and 10 year terms for heavy equipment. Since 2010, the average deal size has been $283 million with a range between $223 million and $334 million. Like SBA 7(a) pools, SBA DCPCs are also backed by the full faith and credit of the U.S. government.
SBIC Debentures
SBIC Debentures are CMBS backed by the SBA’s Small Business Investment Company (SBIC) program. These securities are backed by non-recourse, 10-year loans and equity investments into small businesses across the United States, and proceeds be used for purposes including capital improvements and business acquisitions. Since 2010, the average deal size has been $570 million, with a range of between $339 million to $823 million.
Non-Agency CMBS
Non-agency commercial mortgage-backed securities are issued by banks and private lenders and are not backed by the U.S. government or any GSE. Like agency CMBS, most non-agency CMBS are structured as REMICs (real estate mortgage investment conduits) which are considered pass-through entities for tax purposes. Like some agency CMBS, most non-agency CMBS are divided into multiple tranches based on potential risk and return.
As previously mentioned, non-agency CMBS are backed by commercial real estate loans on income producing properties, including multifamily, retail, industrial, office, and a variety of other property types. Like most of the loans backing agency CMBS, non-agency CMBS loans are generally non-recourse with bad-boy carve outs for issues such as fraud and embezzlement. Non-agency CMBS loans generally have far more lenient borrowing requirements than agency CMBS. For instance, CMBS borrowers often only need to have a net worth of 25% of total loan amount to become approved for financing, while Fannie Mae and Freddie Mac multifamily borrowers often have to have 100% of the loan in net worth, excluding their primary residence.
As of 2022, some of the largest non-agency CMBS lenders in the space include Goldman Sachs, JP Morgan, Citigroup, Morgan Stanley, Wells-Fargo, Barclays Bank, Deutsche Bank, Bank of America.
It should be noted that many non-agency CMBS are SASB (single asset, single borrower) securities, meaning that they are collateralized by one large real estate project which typically obtains $200 million or more in financing from the underlying loan. Some SASB CMBS are $1 billion or more, such as the notable $1.2 billion refinancing of the Atlantis Hotel in 2018.