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First, prepayment terms for commercial mortgages differ significantly from residential mortgages.Commercial mortgages impose prepayment penalties or restrictions on prepayments. Although there are residential mortgages with prepayment penalties, they are a small fraction of the market.
The second difference in structuring is due to the significant difference between commercial and residential mortgages with respect to the role of the servicer when there is a default. With commercial mortgages, the loan can be transferred by the servicer to the special servicer when the borrower is in default, imminent default, or in violation of covenants.
The third difference in structuring between CMBS and RMBS has to do with the role of the buyers when the structure is being created. More specifically, typically potential buyers of the junior bond classes are first sought by the issuer before the deal is structured. The potential buyers first review the proposed pool of mortgage loans and in the review process, depending on market demand for CMBS product, may request the removal of some loans from the pool.
Which of the below statements is FALSE?
A) Although there are residential mortgages with prepayment penalties, they are a small fraction of the market.
B) In structuring a CMBS, if there is a defeasance, the credit risk of a CMBS virtually disappears because it is then backed by U.S. Treasury securities.
C) With commercial mortgages, the loan can be transferred by the servicer to the special servicer when the borrower is in default, imminent default, or in violation of covenants.
D) None of these

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