Zoe Greenwood, vice president at Foundation Investment Advisors, was glancing through the offering memorandum for a new commercial mortgage-backed securities (CMBS) deal on April 1, 2010, a time when the opportunities for commercial mortgage investors had been bleak to the point of comical. This new CMBS deal represented the first opportunity to buy CMBS backed by loans to multiple borrowers since credit markets had shut the securitization pipeline in June 2008.
The offering gave Greenwood a new investment opportunity to suggest to her firm's latest client. She had planned to recommend an expansion in her client's traditional commercial mortgage business, but these new bonds looked intriguing. Could the new CMBS offer her client a superior risk-return tradeoff compared with making individual mortgage loans?
After students have analyzed the case they will be able to:
–Learn how to construct promised cash flows from both commercial mortgages and commercial mortgage-backed securities
–Understand the benefits and costs of direct lending versus indirect lending (purchase of mortgage-backed bonds)
–Underwrite commercial mortgage loans issued by others to identify potentially hidden risks
–Evaluate at what price a mortgage-bond investment makes financial sense
