Commercial vs. Residential Mortgage-Backed Securities
CMBS loans are mortgage-backed securities (MBS) collateralized by loans on commercial properties, while residential mortgage-backed securities (RMBS) are mortgage-backed securities collateralized by loans on residential properties between 1-4 units. Both CMBS and RMBS are technically considered to be collateralized loan obligations (CLOs), though they are typically not referred to as such. In general, both CMBS and RMBS loans are pooled together using real estate mortgage investment conduits (REMICs), securitized, and sold to investors as income-producing bonds on the secondary market.
RMBS and CMBS Tranches Explained
CMBS and RMBS alike are split into different tranches, based on the risk and return. Higher-risk tranches receive higher interest payments but are riskier for investors. Investment-grade MBS are rated AAA/Aaa through BBB-/Baa3, while sub-investment-grade securities are ranked BB+/Ba1 through B-/B3.
Sub-investment-grade mortgage-backed securities are referred to as the B-piece. If CMBS or RMBS borrowers default on their mortgages, A-class bondholders get paid off first, while B-class bondholders only get paid after A-class bondholders are fully compensated.
Agency CMBS and RMBS vs. Non-Agency CMBS and RMBS
It should be noted that CMBS and RMBS are issued by both private firms and the government-sponsored enterprises (GSEs), Fannie Mae, Freddie Mac, and Ginnie Mae. Fannie Mae and Freddie Mac bundle and sell their loans on the secondary market directly, while Ginnie Mae pools and securitizes FHA, VA, Rural Housing Service (RHS), and Public and Indian Housing (PIH) mortgages.
These GSE-issued securities are referred to as agency RMBS or CMBS, while privately issued MBS are referred to as non-agency RMBS or CMBS. As of February 2022, the year-over-year issuance of all types of mortgage-backed securities totaled $290.4 billion, a 30% decrease from the previous 12-month period. Both agency and non-agency CMBS and RMBS are split into tranches as described above.
One of the main differences between agency and non-agency MBS is that agency mortgage-backed securities are guaranteed by the full faith and credit of the federal government, while privately-issued MBS are not.
When it comes to agency vs. non-agency CMBS, another important difference is that agency CMBS are only collateralized by loans on multifamily properties, while non-agency CMBS can be collateralized by any type of income-producing commercial properties, including industrial properties, hotels, retail properties, office buildings, and more exotic property types, such as marinas.