Commercial Mortgage Backed Security (abbreviated CMBS) is similar to Mortgage Backed Security (MBS), but secured by commercial instead of residential property. It is an option of raising capital for Issuer/Companies/Banks etc. A “CMBS” is created when “traditional” commercial mortgages or properties are pooled together into a portfolio of mortgages or properties, which through a securitization process are priced and issued to investors in form of bonds. The price of these bonds is in general set in accordance with the “rating” of the bond. The rating process is carried out by rating institutions like Moody's and Standard & Poor's and is a risk measure of the bond. Following the rating of the bond investment banks then price and issues the bonds to investors. The sales proceeds from these securities will then be returned to the original property owner and this income is used to pay back the loans and the interests and remaining as a working capital of the company. A mortgage-backed security (MBS) is a bond whose cash flows are backed by homeowners mortgage payements. ... A security is a type of transferrable interest representing financial value. ... This article is about the business concept; Commerce is also the name of several places in the United States. ... A residential area is a type of land use where the predominant use is residential. ... Use of the term The concept of property or ownership has no single or universally accepted definition. ... Capital has a number of related meanings in economics, finance and accounting. ... Introduction A mortgage is a device used to create a lien on real estate by contract. ... In finance, a portfolio is a collection of investments held by an institution or a private individual. ... Moodys Investors Service is a company that performs financial research and analysis. ... The Standard and Poors Corporation (S&P), a subsidiary of McGraw-Hill, is a company that performs financial research and analysis on stocks and debt instruments. ...

Benefits from Issuer Perspective

1. This provides a vehicle for transforming relatively illiquid, individual financial assets into liquid and tradable capital market instruments.
2. Originator can replenish its source of funds, which can then be used for additional origination activities.
3. This also provides issuer with what is frequently a more efficient and lower cost source of financing in comparison with other bank and capital markets financing alternatives.
4. At the same time by offering alternative to more traditional forms of debt and equity financing, it allows issuers to diversify their financing sources.
5. Another central objective and benefit of CMBS is that it facilitates the removal of assets from the organization balance sheet. This outcome can help an issuer to improve various financial ratios, utilize capital more efficiently and achieve compliance with risk-based capital standards.

Benefits from Investor Perspective

From the standpoint of investor,

1. CMBS offers significant yield premium over sovereign government issues of comparable maturities. The magnitude of this premium depends on a number of factors, but is more directly related to the credit quality of the security.
2. The significant and virtually limitless variety and flexibility of credit, maturity and payment structures and terms made possible via securitization techniques allows investment product to be tailored in a manner that responds to specific, and sometimes unique investor needs.

Nagaraju Sravan Kumar.