Commercial Mortgage-Backed Securities (CMBS)

When you think of mortgage-backed securities (and we know that you sometimes spend whole weekends staring off into space, contemplating the intricacies of MBSs; don't worry, we do it too) you probably think of the subprime ones that sparked the financial crisis of 2007 and 2008.

These were securities...tradable financial instruments sort of like bonds...backed by bundles of home mortgages. For complicated reasons, at that time, everyone assumed that even bad mortgage risks made good securities...an assumption that proved to be about as wrong as possible.

So in the wake of the near collapse of the financial system, mortgage-backed securities in general got a bad reputation. But not all MBS are backed by subprime mortgages, or even by home mortgages as all. Commercial mortgage-backed securities are a different type.

Instead of being backed by home loans, like the more well-known versions of MBSs, a CMBS is backed by loans on commercial properties. These can be things like apartment complexes, retail stores, restaurants...basically any real estate where someone's work is built (rather than their homes).

It provides investors the opportunity to make money off of commercial properties, without the risk of putting a big chunk of capital into a single property. It provides exposure to a potentially lucrative market, while limiting the risk that any one mortgage will go into default.