Recently, I wrote an article about confusing acronyms. Real estate-related investing is no different. Two of the acronyms that keep popping up are MBS and CMBS. These common acronyms stand for “Mortgage-Backed Securities” and “Commercial Mortgage-Backed Securities” respectively. They are the vehicles by which our real estate market moves forward.
If you look at any bank’s balance sheet, they seemingly will have tons of cash at their disposal, but if you were to consider how many home or commercial loans a bank could make with that available cash, you would quickly find that banks would soon run out of money to fund all the loan requests that they receive. Enter the mortgage backed security (an MBS). An MBS is similar to a bond. Capital firms offer shares in a pool of money that will go to purchase certain loans that are made with certain criteria. For instance, one offering might be for 30 year mortgages with loan-to-values of 80% or less that conform to FNMA guidelines. Conservative investors will purchase shares of the pool and, as the mortgagors make their payments, the investor receives their share of principal and interest back.
Loans are like securities in that they can be purchased and sold. Sometimes, a pool, or traunche as it is known, might sell loans off to investors for many different reasons. The MBS pools might need to raise capital, they might want to move out of a certain state, or they might even want to sell of loans that are past due. Often times, MBS pools will sell loans off at a discount. Note investors line up to purchase such loans.
When you hear the terms MBS or CMBS, they simple refer to pools of mortgages that have been gathered together, or “securitized”, by firms as an investment pool for investors to purchase. If you plan on being a note investor, get used to those acronyms.