Fixed Income - CMBS Call Protection

The Schweser material says that call protection is needed as with any fixed income security when considering CMBS’… why is call protection not discussed anywhere else and only under this section? Also, is call proteciton kind of like prepayment risk only that the prepayment is made by the issuer of the securitized security (e.g., CMBS) as opposed to the borrower?


There really isn’t much call protection in residential MBS. I’m pretty sure it’s illegal to have prepayment penalties on consumer loans in most states. However, commercial loans are a different story. There are no laws protecting commercial borrowers so you will see prepayment penalties in a lot of commercial loans. For instance, call protection can come in the form that if someone pays early, they owe an extra 5% of the balance due. Or there can be a stipulation that says if the commercial borrower pays early, he needs to pay all the interest that would have been paid over the life of the loan. There is also the one where any prepayments have to be invested in Treasuries so that additional interest is paid to the investors.

loan level loan protection- prepayment lockout, defeasance, prepayment penalty points and yield maintenance charges.