We consider ballon risk as a distinguishing feature of Commercial MBS (CMBS) which is not present in Residential MBS (RMBS). But the RMBS can also be partially amortized which leads to ballon payment on maturity which arises ballon risk. So, how can we distinguish CMBS from RMBS on ballon risk basis? Can anyone pls explain!
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This is bcoz RMBS are consist of loan which are recourse i.e. borrower has right to fulfill the balance amt in the case of default and the collateral is not pay the full but in the CMBS they have non recourse loan which give them a great default risk and they are not able to set off their loss from the borrower.
Hope this will help you
Thanks!
Baloon Payment is the risk of not paying the large last payment in the loan which could lead to Extension Risk. This happens when a loan is Partially Amortizing.
In a commercial CBMS the loan is backed by a pool of Commercial mortgages which are highly income generating like shopping malls etc. Income generated by a commercial CBMS can be big enough so that they can pay a big amount of money at the last known as the Baloon Payment to close the loan.
However, in an RMBS, the loans are backed by a pool of residential properties. Residential properties like Houses are not big enough to generate huge cash flows such that they are not in a position to make that last big Balooned Payment. Thus this is the reason, why Baloon Payment is generally not an option under RMBS.
Hope it helps!