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What’s the difference between CMBS and agency loans? This article explains each type of loan and breaks down the pros and cons of each. Understanding all available real estate financing options available is necessary before deciding which financing solution is best for your situation.

CMBS and agency loans are actually somewhat similar in terms of an advance payment. Both are difficult to prepay, and usually offer options such as defeasance and yield maintenance. This is because, like CMBS loans, many Freddie Mac and Fannie Mae loans are combined and securitized to create bonds.

Commercial mortgage-backed securities (CMBS) is fixed-income securities backed by commercial real estate loans. These loans are usually used for commercial properties such as office buildings, hotels, shopping centers, apartment buildings, and factories.

CMBS is created when a bank borrows a set of loans from an account book, bundles them, and then sells them in the form of a series of bonds in the form of evidence. Each series is usually organized by “grade” (i.e. “subdivision”), from the CMBS with the highest rating and the lowest risk or from the “priority issue” to the CMBS with the highest risk and the lowest rating. The agent loan is a term used in the capital market to describe certain types of credit financing, usually called syndicated loans or bilateral loans.

>>>New to real estate investing? Check out 6 Best Practices for Investing in Real Estate before you dive into real estate financing options.

Real Estate Financing Option #1: CMBS – Market Overview

CMBS loans are usually non-recourse loans that meet a set of standard requirements (for example, a single borrower) with maturity of five, seven, 10, or 15 years. Loans can provide advance payments for value creation opportunities after the transaction ends (for example, to improve tenants), but most of the principal will be carried forward at the end of the transaction.

Every CMBS loan has a fixed interest rate. Borrowers need to repay principal and interest monthly, usually based on a 25- to 30-year amortization schedule. However, some loans only include an interest period at the beginning of the period. Assuming there is no default, the payment time and amount of each loan can be determined throughout the loan maturity period.

Commercial mortgage lenders are attracted to the CMBS market because the total value of the bonds backed by the loan pool is usually higher than the sum of all loans. Therefore, lenders can benefit from arbitrage. The securities market also exists in the hands of the lender, which also allows you to fund assets that do not meet the lender’s balance sheet conditions. Compared with lenders selling personal mortgage loans, lenders sell bonds much easier.

Advantages of CMBS

Increased Availability of Funds

Although real estate financing options vary by lender, there are clear limits on the amount of principal that balance sheet lenders can advance because they must save reserves for each loan held on their accounts. These restrictions on the total capital that a balance sheet lender can lend will result in lenders being selective in increasing credits. In contrast, CMBS lenders sell every loan to free up capital and allow them to continue borrowing. Except for the period from 2008 to 2010, the CMBS market has almost no unlimited capital supply.

Lower Interest Rates

For a variety of reasons, the interest rate of CMBS loans is usually lower than that of balance sheet loans. First, the risk in the diversified securitized mortgage pool is less (and therefore the yield is lower), because the loss of a single default loan can be offset by the strength of the remaining loans in the pool.

Second, the original lender earns fees and other income from the sale of securitized loans, including insurance premiums paid by investors from bonds at certain stages. This ensures the lender’s rate of return on investment exceeds its only income from debt repayment income.

Third, the improvement in liquidity and structure has attracted more investors to enter the commercial mortgage market, resulting in lower interest rates than loans on the balance sheet. When the interest rate is low, the difference between the interest rate of the CMBS loan and the balance sheet loan is smaller, because the interest of the CMBS lender is compressed. However, as interest rates rise, the delta becomes more and more important.

Higher Total Loan-to-Value Ratio

Lenders on the balance sheet are usually prohibited from lending more than 70% of the estimated value of the property due to their own institutional guidelines or regulatory requirements. CMBS lenders are generally not subject to the same types of institutional guidelines and regulatory requirements, as in this case, it is not holding loans for its own account. It is not uncommon for CMBS loans to have an LTV of 80% or higher, especially when used with mezzanine loans.

Disadvantages of CMBS

Generally, borrowers are concerned about the lower interest rates and higher LTV provided by CMBS loans, but fail to realize the following disadvantages, which are problematic for many borrowers

The Structural Flexibility is Minimal

The goal of CMBS lenders is too close and securitize loans as quickly as possible. During the securitization process, unless otherwise stated, CMBS lenders must prove that each loan meets CMBS requirements. Any loans that deviate from CMBS requirements may slow down or even disrupt the securitization process.

In order to avoid this situation, CMBS lenders often respond to borrowers’ requests to change the structure or terms of loan documents, saying: “We cannot make this change. CMBS rules prohibit this.” The above statement is usually inaccurate. Most of the time, there is no legitimate reason for CMBS lenders to be unable to process borrowers’ inquiries.

CMBS lenders try to avoid this situation, that is, it is necessary to mark it as an exception in its certification. Therefore, CMBS lenders are generally unwilling to respond to legitimate inquiries and concerns of borrowers. Any borrower who wishes to negotiate effectively with a CMBS lender should take the time to understand which deviations from the lender’s standard guidelines and loan documents must be disclosed by the lender during the securitization process and which deviations are prohibited by law

There is No Credit Continuity

CMBS lenders are not “relational lenders”. The relationship with the borrower is purely transactional. After loan securitization, the original lender (or, if the original lender becomes a servicer, the original lender’s staff) will stop participating in the loan. Now, the borrower must deal with the general service provider and full-time service provider appointed by the asset securitization fund, and there is no relationship between the borrower and them.

A Special Form of Service

Contrary to the main service provider, as long as the special service provider fulfills its fiduciary obligations in the best interests, the special service provider has the right to go beyond (or not restrict) the terms of the loan document. Expert service providers derive most of their income from the fees they charge borrowers for processing specific requests.

If the loan situation requires multiple and extensive interactions with expert service providers, the fees charged by the expert service provider can be offset by the borrower’s benefits from lower interest rates when the borrower pays the professional service provider. It is worth noting that borrowers can usually get more responsiveness and flexibility from specialized service providers by increasing the number of fees they pay.

The Main Form of Service

One of the main responsibilities of the main service provider is to enforce loan applications. The main service provider has no motivation or strong motivation to deviate from the express terms of the loan application. This also applies if the situation clearly requires the freedom to read or modify the loan documents.


A typical requirement of CMBS is that the borrower exempts the lender from liability in accordance with Article 10b-5 of the Securities Exchange Act of 1934 because of its misrepresentation of the information or to investors, rating agencies or securitization. Other parties’ disclosures are not true.

No Unplanned Future Developments

Real estate projects are not static and sometimes unexpected problems arise. When the portfolio lender is unwilling to transfer income exceeding the original commitment amount to the borrower, under CMBS, even if the portfolio lender believes that the capital injection will stabilize the project, it cannot agree to do so.

For example, if the only tenant of the project filed for bankruptcy and refused to pay their lease during the bankruptcy process, the income of the property would be suspended. This situation is problematic for borrowers and lenders. If the borrower subsequently purchases another tenant who is willing to pay a substantial rent, but the borrower does not have enough cash to pay for all tenant upgrades required to establish a new tenant, the portfolio lender may agree to add another tenant.

Lenders can provide loans for this purpose beyond the scope of the original loan approval. In the context of CMBS, after a loan has been securitized, no additional credit can be provided because there is no available lender to grant the loan. Only the servicer and the bondholder do not have the authority needed to obtain additional advance.

Confirmation by Rating Agencies

The needs of borrowers who meet the CMBS requirements will not end with the completion of the loan and will continue until the loan is fully repaid. Even if the terms of the loan document clearly allow certain measures (for example, loan assumptions), it will depend on the borrower’s confirmation from the rating agency that the measures will not lead to a decline in the credibility of securitized securities issued. Borrowers need to pay additional fees and expenses to obtain confirmation from rating agencies. These fees are on top of the fees paid by the borrower to the service provider. Similar to service fees, the cost recognized by rating agencies reduces the borrower’s benefit from lower interest rates.

Lack of Confidentiality

CMBS bonds are publicly traded, and investors in securities have the opportunity to review credit history and disclosure statements before purchasing bonds. The information available to potential investors includes financial information about borrowers and sponsors.

Given the widespread dissemination of information, borrowers should not expect confidentiality. If confidentiality is critical to the success of the underlying asset (for example, a tenant’s data center) or the borrower (for example, a well-known person), then a CMBS loan may not be a good choice for the borrower.

Real Estate Financing Option #2: Agency Loans – Overview

Agency loan is a term used in capital markets to describe certain types of loan financing which is negotiated amongst the agents, lenders, borrowers, and other loan parties. It is commonly referred to as bilateral loans or syndication. In both cases any company, also referred to as a “borrower”, needs to secure financing through this system.

Advantages of Agency Loans

Correspondent banking can bring many benefits, including expanding population security while covering a larger population. The following are advantages of agency loans:

Lowest Interest Rates and Highest LTV

Typically agency loans offer higher loan-to-value amounts than CMBS loans and lower interest rates. Though CMBS loans offer low interest rates, agency loans typically are amongst the lowest.

Advanced Banking Services

Agent banking also includes extending banking services to the bottom of society through authorized agents. Through these types of real estate financing options, the banking industry is pooling resources to provide these services while ensuring that related costs are reduced.

Reduce Operating Costs

This form of banking reduces operating costs for financial institutions. Correspondent banking promotes financial inclusion by extending banking and financial services to under-funded, under-funded, and under-served people. Such real estate financing options provide more flexible and convenient access methods for existing and new customers.

Support Economic Growth

In the next few years, correspondent banking may play a very important role in promoting financial inclusion. Agents provide financial services to small businesses and individuals, which are essential to promote economic growth and local development. Correspondent banking is a win-win choice for every participant.

Agents can sell many professional services and products on behalf of banks that provide services to customers in remote areas. Customers can easily access authorized financial service providers. Banks will win when they increase their market share.

Ensure Safety

This type of banking also contributes to the safety of customers who do not have to travel long distances or go to various bank branches for a long time. During such a long journey, there is less risk of being robbed or losing productivity and time.

Disadvantages of Agency Loans

Agency loans do have some disadvantages to them as well. For large loans, you must comply with certain terms or conditions. Loans are not very flexible–you can pay interest with money you don’t use. If your tenants do not pay immediately, you may have difficulty making monthly payments, which can cause cash flow problems.

In some cases, the loan is secured by company assets or personal property, for example: The interest rate of a secured loan may be lower than that of an unsecured loan, but if you are unable to repay, your assets or house may be at risk. If you want to repay the loan before the loan term expires, you may have to charge a fee, especially if the loan interest rate is fixed.

Due diligence on agency loans can be exhaustive as well. Fannie Mae and Freddie Mac now have specific requirements related to pest control, building systems and geographical concerns including seismic risk. They have also implemented new regulations regarding Phase I assessments related to radon, lead-based paint and asbestos.

→ FREE PDF DOWNLOAD: Due Diligence Checklist – to complete before seeking financing

The timeline for closing is longer on agency loans. With HUD loans for example, the total timeline from initial engagement to close is on average four and a half months. It typically takes 45-60 days for an application to be submitted to HUD, followed by a 60-90 day waiting period for HUD to issue their commitment, with closing occurring another 30-45 days after the commitment is issued. Should any complexities arise the timeline to close could extend to six month or longer.

More from Veloce Capital

Knowing all the facts can help you make the right choice between the many real estate financing options available, including agency loans and CMBS loans, and we’re here to help! Here at Veloce Capital, we can help you as you take the first steps into real estate investing. We’ll help you set up an entire plan that works for you from start to finish.

For more information please email us at info@velocecapital.com


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Kenny, Thomas. “Learn the Difference: Agency and Non-Agency Mortgage-Backed Securities.” The Balance, 8 Feb. 2020, www.thebalance.com/agency-vs-nonagency-mbs-416923.

Kenny, Thomas. “Pros and Cons of Commercial Mortgage-Backed Securities.” The Balance,www.thebalance.com/what-are-commercial-mortgage-backed-securities-cmbs-416910.

Loans, Multifamily. “The Pros and Cons of CMBS Loans: A Guide.” Multifamily.loans, Multifamily.loans, 22 Feb. 2019, www.multifamily.loans/apartment-finance-blog/the-pros-and-cons-cmbs-of-cmbs-loans-a-guide.