Question by Scott45: Question about Loan Securitization?
Company ABC is looking to refinance a 75 million securitized loan on an office building in NY. Is this basically just saying the loan has been sectioned off in different tranches and was sold to investors via CMBS. Can someone give me alittle insight on the securitization process how and why it happens and who all does it.Also take the above example and say they can’t find the cash for the refi.. How would that effect the cmbs security they bought if one of the properties within goes in default

Best answer:

Answer by ronwizfr
Suppose you are a mortgage company. You have $ 1 million in capital, loaned out to 10 customers at 8% interest rate over 30 years. Obviously you are going to get your money back, either in payments or in foreclosed houses but it´s going to take a while. So in order to have the million back today you sell them to some other investors. Obviously you have to give up some of your future profits for cash now.

You could sell those 10 loans to 10 investors. Each investor would be taking a risk in buying those loans, because if any loan defaults, that one investor loses his money. Naturally, investors would not be willing to pay very much for those loans, knowing the risk involved. In order to get a better price, you combine the 10 loans into one special purpose entity, which you then split into 10 equal shares. Each investor still pays the same $ 100,000+x, but instead of owning one loan, they will own 10% of all 10 loans. If one loan fails, every investor loses only 10%.

And you can do even better, by buying credit derivatives insuring against the default or inflation and adding them to the entity.

The result is that you will be able to sell the loan assets for more money, and investors are insulated from the volatility of directly owning mortgages.

Give your answer to this question below!