Question on CMBS vs Residential collateral

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tenten

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Hey everyone I have a question regarding CMBS. In the Schweser books page 254 of Book 4, it says
“CMBS mortgages are structured as non-recourse loans, meaning that the lender can only look to the collateral as a means to repay a delinquent loan if the cash flows from the property are insufficient. In contrast, the residential mortgage lender can go back to the borrower personally in an attempt to repay a delinquent mortgage loan. ”
But in the problem that is below, it does not differentiate between CMBS or Residential. I would think that if they asked about CMBS the answer would be B but if they asked about Residential the asnwer would be C. The answer seems to imply a CMBS since it is choice B. Am I overthinking this?
Which of the following is a characteristic of a mortgage loan?
A) A very risky loan since it is unsecured.
B) If the borrower defaults on the loan, the lender has the right to seize the collateral.
C) If the borrower defaults on the loan, the lender has the right to seize all assets of the borrower to ensure that the loan is paid off.
Your answer: B was correct!
With a mortgage loan, the borrower must make a series of mortgage payments over the life of the loan, and the lender has the right to “foreclose” or lay claim against the real estate in the event of loan default.
 
Even though commercial mortgages exist, I believe the CFAI implies a residential mortgage loan when it uses the term.
 
but in that case the answer would be C, since it is in residential mortgage loans that the lender can sieze assets outside of just the collateral
 
Tenten,
If you default on a residential mortgage loan the banks would simply repossess the house. They can’t take everything that you own.
Where did you read otherwise?
 
because we couldn’t figure whether it is a rmbs or cmbs,so b is best answer since whatever it is,the collateral will be seized for uncovered debt.
 
guys look at page 252 of schweser book 4. it says
“CMBS mortgages are structured as nonrecourse loans, meaning that the lender can only look at the collateral as a means to repay a delinquent loan if the cash flows from the property are insufficient. In contrast, the residential mortgage lender can go back to the borrower personally in an attempt to repay a delinquent mortgage loan.”
I thought that “go back to the borrower personally” just meant that you could contact/harrass the owner and that’s all that they mean but I looked up nonrecourse loans online and it seems that indeed recourse loans mean that you can go to the borrower’s personal assets. This is what I found:
Recourse loans get their name from the fact that lenders have power. They are allowed to go after you for amounts that you owe - even after they’ve taken collateral. If you default on a recourse loan, the lender can bring legal cases against you, garnish your wages, and try to collect the amount you owe.
A non-recourse loan does not allow the lender to pursue anything other than collateral. For example, if you default on your non-recourse home loan, the bank can only foreclose on the home. They generally cannot take further legal actions against you. The bank is out of luck even if the sale proceeds do not repay the loan.
 
That makes sense but I guess they would only do that if you owe more than the house was worth? Even then I’m not sure cause that would be there own fault. They gave u the loan on the property at the time the mkt value of the house was high.
Not sure. That may apply to other ABS securities. Maybe credit cards receivables?
I wouldn’t over think this either way.
 
JP,
thanks for the help. im really not trying to overthink this. simply put, that page in schweser says that cmbs are nonrecourse (lender can only come after collateral) as opposed to residential which are recourse (lender can come after borrower personally).
with that said, i think there is a conflict in schweser, and the original question above answer should be C.
has anyone else come across this??
 
I think C is very extreme and incorrect.
There are state laws that disallow the type of grab impled in C.
Yes the lender can affect the borrowers credit history and attempt to collect on the loan using a collection agency etc. , but he cannot go after ALL the assets of the borrower.
However the focus is more on non-recourse where the cash producing assets are on lien to the lender .
 
Tenton, look on pg363 of the CFAI fixed income book. “The mortgage gives the lender the right to “foreclose” on the loan if the borrower defaults to seize the property in order to ensure that the debt is paid off”.
Doesn’t say anything about going after the borrowers assets or anything for a residential mortgage loan.
I think maybe for credit card receivables or certain loans that are only backed by the credit of the borrower are they able to come after other assets. The whole reason why you’re able to get such a good int rate on mortgages compared to other securities (credit cards, personal loans) is because if the lender defaults, they aren’t left with nothing.
 
Tenten, you’re right. But, you’re also overthinking this.
Consider this. We know for sure that “B” is correct. The lender can seize the collateral. That said, “C” could be correct. (For instance, there is such a thing as a nonjudicial foreclosure where the lender can’t seize the borrower’s assets vs a judicial foreclosure, but frankly this is getting too deep and will only confuse….stick to the text).
That said, if we know “B” is correct, go with B. There can’t be two correct items. You’re safe with B, even though C may be correct.
Make sense at all or am I blathering?
Best in June!
 
janakisri Wrote:
——————————————————-
> I think C is very extreme and incorrect.
>
> There are state laws that disallow the type of
> grab impled in C.
>
> Yes the lender can affect the borrowers credit
> history and attempt to collect on the loan using a
> collection agency etc. , but he cannot go after
> ALL the assets of the borrower.
>
> However the focus is more on non-recourse where
> the cash producing assets are on lien to the
> lender .
I like this explanation. I think C really is extreme because of the text “has the right to seize all assets of the borrower to ensure that the loan is paid off. ”
I think recourse loans (which residential mortgages are) only allow the lender to do certain limited things like you mentioned, so B is more correct than C.
 
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