Commercial mortgage backed securities (CMBS)

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What are they?

As the name suggests, a commercial mortage backed security is a mortgage backed security formed by securitising the stream of future repayments on a commercial mortgage.

CMBS are just like residential mortgage backed securities, except their debt is secured against commercial rather than residential mortgages.

The CMBS market in Europe and Asia was not nearly as well developed as the market in the US. In the first eight months of 2007, 11.5bn of commercial mortgage backed securities were issued in the UK market. By comparison, $38.5bn of CMBS were issued in the US in March 2007 alone.

What have they got to do with the financial crisis?

CMBS have suffered the same fate as other forms of asset backed securities linked to mortgages - no one wants to buy them any more.

Issuance figures show just how dire the situation has become. In the first eight months of 2008, no new CMBS deals were done at all in the UK.

In the US, a total of $253bn of CMBS were issued in 2007, according to the Financial Times. In the first five months of 2008, issuance was down 89% on the figure for the comparable period of 2007.

Figures are similar for Asia - the Japanese CMBS market plummeted 90% between the fourth quarter of 2007 and the first quarter of 2008, for example.

The collapse of the CMBS market is important because if banks can't package commercial mortgages up and sell them on, there are fears that they'll make fewer commercial mortgages to begin with. And with fewer mortgages being made, there will be no one to buy commercial property and prices will dive.

Standard & Poor's, the ratings agency, faced a blast of controversy when it proposed to downgrade hundreds of billions of dollars in CMBS, just as many holders of the troubled securities are hoping for high-enough ratings to qualify them for a government bailout. The CMBS crisis, if and when it arrives, could be as large as $1 trillion.

Last updated on 7 September 2009.

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