Deck 24: Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Question 1

A ________ is a contractual agreement that prohibits any prepayments during a specified period of time, called the lockout period.

A) defeasance
B) yield maintenance charges
C) prepayment lockout
D) prepayment penalty points

Answer 1

C

Question 2

Regardless of the property type, the two measures that have been found to be key indicators of the potential credit performance are the ________.

A) debt-to-equity leverage ratio and the loan-to-value ratio.
B) debt-to-service coverage ratio and the loan-to-value ratio.
C) debt-to-service coverage ratio and the value-to-loan ratio.
D) debt-to-equity leverage ratio and the value-to-loan ratio.

Answer 2

B

Question 3

A commercial mortgage loan is originated either to ________.

A) finance a commercial purchase or to refinance a prior mortgage obligation.
B) finance a residential purchase or to refinance a prior mortgage obligation.
C) finance a commercial purchase or to refinance a subsequent mortgage obligation.
D) None of these

Answer 3

A

Question 4

Commercial mortgage loans are for mortgage loans for ________.

A) mortgage-producing properties.
B) income-manufacturing mortgages.
C) income-producing properties.
D) mortgage-manufacturing properties.

Question 5

With ________, the borrower provides sufficient funds for the servicer to invest in a portfolio of Treasury securities that replicates the cash flows that would exist in the absence of prepayments.

A) defeasance
B) yield maintenance charges
C) prepayment lockout
D) prepayment penalty points

Question 6

Which of the below statements is FALSE?

A) A seasoned loan is one that is already residing on the balance sheet of a bank or insurance company.
B) Responsibilities of the servicer include collecting monthly loan payments, keeping records relating to payments, and maintaining property escrow for taxes and insurance.
C) Responsibilities of the master servicer include overseeing the deal and verifying that all servicing agreements are being maintained.
D) Basically the objective of the master service is to maximize the recovery of defaulted loans.

Question 7

The structure of a CMBS transaction is the same as in a nonagency RMBS ________.

A) in that most structures have a sing bond class (tranch) with the same rating, and there are regulations for the distribution of interest and principal to the bond class.
B) in that most structures have multiple bond classes (tranches) with the same ratings, and there are rules for the distribution of interest and principal to the bond classes.
C) in that most structures have multiple bond classes (tranches) with different ratings, but there are no regulations for the distribution of interest and principal to the bond classes.
D) in that most structures have multiple bond classes (tranches) with different ratings, and there are rules for the distribution of interest and principal to the bond classes.

Question 8

In regards to commercial mortgage loans, which of the below statements is FALSE?

A) Commercial mortgage loans are typically balloon loans requiring substantial principal payment before the end of the balloon term.
B) If the borrower fails to make the balloon payment, the borrower is in default.
C) The lender may extend the loan and in so doing will typically modify the original loan terms.
D) Balloon risk is the risk that a borrower will not be able to make the balloon payment because the borrower either cannot arrange for refinancing at the balloon payment date or cannot sell the property to generate sufficient funds to pay off the balloon balance.

Question 9

The largest sector of the CMBS market is constituted by ________.

A) securities backed by Ginnie Mae.
B) securities issued by private entities.
C) securities backed by Freddie Mac.
D) securities issued by the two government-sponsored enterprises.

Question 10

Ginnie Mae ________.

A) issues securities that are not backed by FHA-insured multifamily housing loans.
B) does not create project loan pass-through securities.
C) purchase multi­family loans from approved lenders and either retain them in their portfolio or use them for collateral for a security.
D) creates securities that can be backed by a single project loan on a completed project or one or more project loans.

Question 11

Commercial mortgage loans are ________, which means that if the borrower fails to make the contractual payments, the lender can only look to the income-producing property backing the loan for interest and principal repayment.

A) nonpayment loans
B) contractless loans
C) remedial loans
D) nonrecourse loans

Question 12

________ are predetermined penalties that must be paid by the borrower if the borrower wishes to refinance.

A) defeasance
B) Prepayment penalty points
C) prepayment lockout
D) None of these

Question 13

For commercial mortgage loans, call protection can take the following forms: ________.

A) prepayment lockout and defeasance.
B) prepayment lockout and prepayment penalty points.
C) defeasance and yield maintenance charges.
D) All of these

Question 14

________ is a security backed by one or more commercial mortgage loans.

A) A CMBS
B) An RMBS
C) An FHA
D) A COM

Question 15

CMBS can be issued by ________.

A) Ginnie Mac
B) Fannie Mac.
C) Freddie Mae.
D) private entities.

Question 16

CMBS ________.

A) are backed by seasoned commercial mortgage loans.
B) are backed by newly originated loans.
C) can be backed by a single borrower.
D) All of these

Question 17

If there is a default on a commercial mortgage loan, the lender looks to the proceeds from the ________ for repayment and has ________ to the borrower for any unpaid balance.

A) sale of the property; no recourse
B) sale of the property; little recourse
C) purchase of the property; no recourse
D) sale of the property; recourse

Question 18

Which of the below statements is TRUE?

A) One type of RMBS is those backed by large properties such as regional malls or office buildings.
B) Conveyance deals are created by investment banking firms that establish a conduit arrangement with mortgage bankers.
C) CMBS deals (that are called fusion deals or hybrid deals) are multiple borrower CMBS deals that combine loans that are included in conduit deals with a large or "mega" loan.
D) All of these

Question 19

Which of the below statements is FALSE?

A) For residential mortgage loans, "value" is either market value or appraised value.
B) For income-producing properties, the value of the property is based on the fundamental principles of valuation: the value of an asset is the present value of its expected cash flow.
C) In valuing commercial property, the cash flow is the future NOI and the discount rate (reflecting the risks associated with the cash flow) is used to compute the present value of the future NOI.
D) Investors are often confident about estimates of market value and the resulting LTVs reported for properties.

Question 20

Which of the below statements is TRUE?

A) The debt-to-service coverage ratio (DSC ratio) is the ratio of a property's net operating income (NOI) multiplied by the debt service.
B) The higher the DSC ratio, the more likely it is that the borrower will be able to meet debt servicing from the property's cash flow.
C) The NOI is defined as the rental income plus cash operating expenses (adjusted for a replacement reserve).
D) A ratio less than 1 for DSC means that the cash flow from the property is sufficient to cover debt servicing.

Question 21

CMBS are backed by either newly originated or seasoned commercial mortgage loans.

Question 22

The most prevalent form of deal backed by commercial mortgage loans to multiple borrowers is the conduit deal. Describe the nature of this "conduit deal"?

Question 23

What is a prepayment lockout?

Question 24

Which of the below statements is FALSE?

A) Although there are residential mortgages with prepayment penalties, they are a small fraction of the market.
B) In structuring a CMBS, if there is a defeasance, the credit risk of a CMBS virtually disappears because it is then backed by U.S. Treasury securities.
C) With commercial mortgages, the loan can be transferred by the servicer to the special servicer when the borrower is in default, imminent default, or in violation of covenants.
D) None of these

Question 25

Put protection for commercial mortgage loans includes prepayment lockout, defeasance, prepayment penalty points, and yield maintenance charges.

Question 26

Fusion or hybrid deals are multiple borrower CMBS deals that combine loans that are included in conduit deals with a large or "mega" loan.

Question 27

Describe some main features of a commercial loan.

Question 28

CMBS can be classified by the type of loan pool. Name and briefly describe the two types.

Question 29

One of the three major differences in the structures of a CMBS transaction and a nonagency RMBS transaction include: ________.

A) Residential mortgages impose prepayment penalties or restrictions on prepayments.
B) The role of the buyers when the structure is being created is different.
C) With residential mortgages, the loan can be transferred by the servicer to the special servicer when the borrower is in default, imminent default, or in violation of covenants.
D) All of these

Question 30

The two measures that have been found to be key indicators of the potential credit performance of a commercial mortgage loan are the debt-to-service coverage ratio and the loan-to-value ratio.

Question 31

What is a yield maintenance charge?

Question 32

CMBS can be issued by Ginnie Mae, Fannie Mae, Freddie Mac, and private entities.

Question 33

In a CMBS transaction, the special servicer is responsible for overseeing the deal, verifying that all servicing agreements are being maintained, and facilitating the timely payment of interest and principal.

Question 34

CMBS can be classified only by CMBS with loans from a single borrower.

Question 35

Residential mortgage loans are nonrecourse loans for the purchase of income-producing properties, the major ones being apartment buildings, office buildings, industrial properties, shopping centers, hotels, and health care facilities.

Question 36

A commercial mortgage-backed security is a security backed by at least two commercial mortgage loans, the loans being either newly originated or seasoned loans.

Question 37

Balloon risk associated with a commercial mortgage loan is the risk that a borrower will not be able to make the balloon payment because either the borrower cannot arrange for refinancing at the balloon payment date or cannot sell the property to generate sufficient funds to pay off the balloon balance.

Question 38

In regards to commercial mortgage loans, name four of the major property types that have been securitized.

Question 39

The least prevalent form of deal backed by commercial mortgage loans to multiple borrowers is the conduit deal.

Question 40

Balloon risk is something that has to be dealt with in structuring an RMBS.

Question 41

As with a nonagency RMBS, a servicer is required. Name three responsibilities of a servicer.

Question 42

Are CMBS and nonagency RMBS structures similar or different? Discuss.