Since their arrival in the 1980s, commercial mortgage–backed securities (CMBS) have held great promise for commercial real estate borrowers. They greatly increased capital flows into commercial real estate and offered lower-cost loans in exchange for cumbersome loan documentation and less flexibility to make changes to the loan and collateral once it was funded.
Lenders prospered as they collected loan-origination fees while being able to quickly sell those loans to CMBS packagers who seemed to have an unlimited appetite. According to the Compendium of Statistics published October 11, 2011, by the CRE Finance Council, over $1 trillion of commercial real estate loans were originated for securitization during the ten years that ended in January 2007. Call this CMBS 1.0.
However, the residential subprime mortgage crisis in 2007 made it dismayingly clear that elaborate structuring and geographic diversification would not protect investors from ill-conceived loans. The market for CMBS abruptly dried up as buyers lost faith in loan originators and rating agencies.
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