Definition of Commercial Mortgage Backed Securities (CMBS)

securities backed by mortgages on commercial properties such as multifamily apartment buildings, office towers, industrial buildings, hotels, and retail shopping malls. Commercial mortgage securities are usually collateralized by fixed-rate mortgages that are locked out from prepaying for 5 to 10 years but may also have floating-rate bonds collateralized by shorter-term prepayable mortgages. The pool of securities has a multiclass structure starting with investment-grade bonds that are rated triple-A extending all the way down to unrated junior class bonds. If any mortgage loan defaults, losses are allocated to the lowest rated bonds and recoveries are credited to the senior-level investment-grade bonds. This allocation of loss enables the entire collateral loan pool to be sold to a variety of investors. Investor analysis usually focuses on the pools' default and liquidation potential to prepay higher-rated classes or create losses for the lower rated credit classes.