Content area
Full Text
Synthetic collateralized mortgage-backed securities are tools for harnessing and exploiting commercial mortgage and real-estate expertise.
Synthetic collateralized mortgage-backed securities are tools for harnessing and exploiting commercial mortgage and real-estate expertise. Using synthetic CMBS, an investor can gain leverage for aggressive speculation or apply sophisticated hedging strategies to manage risk.
One example of a basic synthetic CMBS is a credit-default swap that references an actual CMBS class. This type of synthetic CMBS allows an investor to take exposure to a CMBS class that may be unavailable in cash form because others own it. This type also permits increased investment leverage through unfunded transactions, where an investor can assume the risk of owning a CMBS without paying-in principal at the inception of the trade, i.e., the investor sells protection on the credit risk of the CMBS. This type of synthetic CMBS also facilitates shorting by allowing an investor to buy protection.
Another example of synthetic CMBS--but one that has not actually occurred yet--is a derivative contract that references commercial mortgage loans held by third parties but for which information is readily available. This kind of structure allows an investor to create a customized synthetic pool, representing exposures to loans that may have been included in different CMBS deals in the past. The actual loans may have been originated over a span of many years by different lenders. Such a trade permits an investor to artificially construct a pool of credit exposures that might be impossible to obtain in cash form.
A third example of synthetic CMBS is a multi-layered derivative in the form of a synthetic resecuritization of CMBS. Such a structure resembles a static, synthetic CDO that references CMBS or other commercial real-estate assets. The resecuritization layer does not actually own its underlying reference credits. Rather, it is a derivative contract that refers to them....