Week 3 CRE

Commercial Mortgage Debt Outstanding

The total amount of commercial and multifamily loans currently unpaid (about $4.93 trillion).

Primary Mortgage Market

The market where loans are originated between borrower and lender; pricing (rate, term, amortization) is set using underwriting metrics like LTV = Loan ÷ Value and DSCR = NOI ÷ Debt Service. This is where the loan is created and funded.

Secondary Mortgage Market

The market where originated loans are sold to investors or agencies to create liquidity and reduce asset–liability mismatch; enables securitization and national capital flow.

Liquidity

The ability to convert mortgages into cash quickly; created when lenders sell loans in the secondary market and recycle capital to lend again.

Asset–Liability Mismatch

Occurs when lenders fund long-term fixed-rate mortgages with short-term deposits; managed by selling loans to avoid being locked into long-duration assets.

Geographic Flow of Funds

Movement of capital from cash-rich areas to high-growth, cash-poor areas through the secondary market.

Standardization

The process of making loans uniform so they can be easily sold and traded.

Mortgage-Backed Security (MBS)

A security created by pooling mortgages and selling ownership of their cash flows; transforms illiquid loans into tradable fixed-income investments.

Mortgage Pass-Through (MPT)

A type of MBS where borrower payments are collected, servicing and guarantee fees are deducted, and the remainder is passed to investors. (Borrower Note Rate − Servicing Fee − Guarantee Fee = Investor Coupon.)

Servicer

The company that collects mortgage payments and distributes them to investors.

Coupon Rate

The interest rate investors receive on a mortgage-backed security.

Spread (Servicing Spread)

The difference between the borrower’s mortgage rate and the investor’s coupon rate.

Collateralized Mortgage Obligation (CMO)

A structured MBS that divides pooled cash flows into tranches with different risk and maturity profiles; redistributes prepayment risk instead of sharing it equally.

Interest Rate Risk

The risk that rising interest rates reduce the market value of a mortgage investment.

Default Risk

The risk that the borrower stops making payments. (evaluated using LTV (collateral cushion) and DSCR (cash flow coverage)

Delay Risk

The risk caused by time lags between borrower payments and investor receipts. (14 to 70 days;reduces effective yield due to time value of money.)

Prepayment Risk

The risk that borrowers pay off loans early, forcing investors to reinvest at lower rates.

Balloon Loan

A loan with small monthly payments but a large remaining balance due at maturity.

Amortization

The gradual repayment of a loan through scheduled payments over time.

Outstanding Principal Balance (OPB)

The amount of loan principal still owed at a specific point in time. (Present Value of remaining payments discounted at the contract rate.)

Refinancing Risk

Risk borrower cannot replace debt at balloon maturity due to higher rates, lower property value, or tighter credit markets.

Yield Maintenance (Make-Whole Provision)

A prepayment penalty that compensates lenders for lost interest if a loan is paid off early. (PV(Remaining Payments discounted at current Treasury rate) − OPB.)

Reinvestment Risk

The risk that returned principal must be reinvested at lower interest rates.

Financial Leverage

Using borrowed money to increase potential returns on investment. (ROE = Cash Flow to Equity ÷ Equity Invested.)

Positive Leverage

When the property’s return is higher than the cost of debt, increasing equity returns.

Negative Leverage

When the cost of debt exceeds the property’s return, reducing equity returns.

Break-Even Interest Rate (BEIR)

The interest rate where leverage stops helping and starts hurting returns. (Cost of Debt = Property Cap Rate.)

Participation Loan

A loan where lender receives base interest plus a percentage of NOI or sale proceeds; combines fixed income with equity-like upside.

Mezzanine Financing

High-interest secondary financing that fills the gap between senior debt and equity. carries higher interest due to increased default risk and lower repayment priority.

Capital Stack

The layered structure of financing for a property: Senior Debt (paid first, lowest risk), Mezzanine Debt (subordinate, higher return), Equity (paid last, highest risk).