Question 1

Commercial Mortgage Loans&#10;&#10;-Which of the below statements is TRUE?&#10;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.&#10;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.&#10;C) The NOI is defined as the rental income plus cash operating expenses (adjusted for a replacement reserve).&#10;D) A ratio less than 1 for DSC means that the cash flow from the property is sufficient to cover debt servicing.

Accepted Answer

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

Question 2

Commercial Mortgage Loans&#10;&#10;-Which of the below statements is FALSE?&#10;A) For residential mortgage loans, &#34;value&#34; is either market value or appraised value.&#10;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.&#10;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.&#10;D) Investors are often confident about estimates of market value and the resulting LTVs reported for properties.

Accepted Answer

Investors are often skeptical about estimates of market value and the resulting LTVs reported for properties.

Question 3

Commercial Mortgage Loans&#10;&#10;-In regards to commercial mortgage loans, which of the below statements is FALSE?&#10;A) Commercial mortgage loans are typically balloon loans requiring substantial principal payment before the end of the balloon term.&#10;B) If the borrower fails to make the balloon payment, the borrower is in default.&#10;C) The lender may extend the loan and in so doing will typically modify the original loan terms.&#10;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.

Accepted Answer

Commercial mortgage loans are typically balloon loans requiring substantial principal payment at the end of the balloon term.

Question 4

Commercial Mortgage-Backed Securities&#10;&#10;-Which of the below statements is FALSE?&#10;A) A seasoned loan is one that is already residing on the balance sheet of a bank or insurance company.&#10;B) Responsibilities of the servicer include collecting monthly loan payments, keeping records relating to payments, and maintaining property escrow for taxes and insurance.&#10;C) Responsibilities of the master servicer include overseeing the deal and verifying that all servicing agreements are being maintained.&#10;D) Basically the objective of the master service is to maximize the recovery of defaulted loans.

Accepted Answer

The responsibilities of the servicer include collecting monthly loan payments, keeping records relating to payments, maintaining property escrow for taxes and insurance, monitoring the condi­tion of underlying properties, preparing reports for the trustee, and transferring collected funds to the trustee for payment to bondholders.
In a CMBS transaction, there is usually a master servicer and special servicer. The master servicer is responsible for (1) overseeing the deal, (2) verifying that all servicing agreements are being maintained, and (3) facilitating the timely payment of interest and principal.
Basically the objective of the special service is to maximize the recovery of defaulted loans.

Question 5

Commercial Mortgage-Backed Securities&#10;&#10;-The structure of a CMBS transaction is the same as in a nonagency RMBS ________.&#10;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.&#10;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.&#10;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.&#10;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.

Accepted Answer

The structure of a CMBS transaction is the same as in a nonagency RMBS 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 6

Commercial Mortgage-Backed Securities&#10;&#10;-One of the three major differences in the structures of a CMBS transaction and a nonagency RMBS transaction include: ________.&#10;A) Residential mortgages impose prepayment penalties or restrictions on prepayments.&#10;B) The role of the buyers when the structure is being created is different.&#10;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.&#10;D) All of these

Accepted Answer

The structure of a CMBS transaction is the same as in a nonagency RMBS 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. However, there are three major differences due to the features of the underlying loans.
First, prepayment terms for commercial mortgages differ significantly from residential mortgages. Commercial mortgages impose prepayment penalties or restrictions on prepayments. Although there are residential mortgages with prepayment penalties, they are a small fraction of the market.
The second difference in structuring is due to the significant difference between commercial and residential mortgages with respect to the role of the servicer when there is a default. 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.
The third difference in structuring between CMBS and RMBS has to do with the role of the buyers when the structure is being created. More specifically, typically potential buyers of the junior bond classes are first sought by the issuer before the deal is structured. The potential buyers first review the proposed pool of mortgage loans and in the review process, depending on market demand for CMBS product, may request the removal of some loans from the pool.

Question 7

Commercial Mortgage-Backed Securities&#10;&#10;-Which of the below statements is FALSE&#10;A) Although there are residential mortgages with prepayment penalties, they are a small fraction of the market.&#10;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.&#10;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.&#10;D) None of these

Accepted Answer

All the statements provided are true, so none of them is false.

Deck 28: Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities