JustasS

When assessing credit risk for a commercial mortgage-backed security (CMBS), the underwriter will calculate which of the following ratios?

A) Both the debt-to-service coverage ratio and the loan-to-value ratio.

B) Loan-to-value ratio only.

C) Debt-to-service coverage ratio only.

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When assessing credit risk for a CMBS, the underwriter will complete both the debt-to-service coverage ratio and the loan-to-value ratio.

JustasS

A distinguishing characteristic of a commercial mortgage-backed security (CMBS) as compared to residential mortgages is:

A) Residential mortgages are non-recourse.

B) Both CMBS and residential mortgages are non-recourse.

C) CMBS are non-recourse.

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CMBS are non-recourse. Residential mortgages are recourse, meaning that the lender can go back to the homeowner for payment if the collateral is insufficient.

JustasS

Which of the following statements is most accurate concerning the effect of defeasance on the quality of a Commercial mortgage-backed securities (CMBS) loan pool? Defeasance:

A) increases the quality of a CMBS loan pool by requiring fees for late payments.

B) decreases the quality of a CMBS loan pool by selling some of the pool as payments come due.

C) increases the quality of a CMBS loan pool by reinvesting any prepayments in Treasury securities.

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Defeasance increases the quality of a CMBS loan pool by reinvesting any prepayments in Treasury securities.

JustasS

Commercial Mortgage-Backed Securities (CMBS) provide structural call protection through which of the following key repayment terms?

A) Sequential repayment of the CMBS tranches and the allocation of losses of principal to specific tranches, rather than to the CMBS overall.

B) Losses of principal are allocated to specific tranches, rather than to the CMBS overall.

C) Sequential repayment of the CMBS tranches.

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CMBS securities provide structural call protection through sequential repayment of the CMBS tranches, as well as the allocation of losses of principal to specific tranches rather than to the overall CMBS.

JustasS

Which of the following regarding key credit enhancement features of defeasance as prepayment protection is least accurate?

A) No distributions are made when the defeasance takes place, so there is no issue concerning how prepayment penalties will be disbursed.

B) The duration of the defeasance funds reduces the credit risk of the commercial mortgage-backed securities (CMBS).

C) The cash flow from the defeasance funds is substituted for payments made by the borrower.

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Duration is related to interest rate risk; it is not related to credit risk.

JustasS

Commercial mortgage-backed securities (CMBS) provide call protection through loan-level and individual mortgage call protection. Which of the following are least likely forms of call protection?

A) Borrowers are charged the amount of interest lost by the lender had the loan not been prepaid.

B) Penalty fees assessed against the borrower for prepayment.

C) If borrowers prepay their loan, proceeds are distributed to investors.

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Loan-level call protection includes: defeasance, prepayment penalty charges, prepayment lock out period, and yield maintenance charges. Prepayment proceeds should not be distributed to investors. When borrowers prepay, the mortgage loan can be “defeased” – the loan proceeds are received by the loan servicer and invested in U.S. Treasuries to create cash collateral against the loan.

JustasS

The strongest form of prepayment protection is:

A) yield maintenance charges.

B) defeasance.

C) a one year prepayment lockout.

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Defeasance occurs when prepayment loan proceeds received by the loan servicer are invested in U.S. Treasury securities. When the defeasance period ends, the U.S. Treasuries are liquidated and the proceeds are used to repay the mortgage. The collateral provided by the U.S. Treasuries is of higher quality than the underlying asset; therefore, defeasance represents the greatest level of prepayment protection for an investor.