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Asymmetric information, adverse selection, and the pricing of CMBS

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  • An, Xudong
  • Deng, Yongheng
  • Gabriel, Stuart A.

Abstract

We demonstrate that asymmetric information between sellers (loan originators) and purchasers (investors and securities issuers) of commercial mortgages gives rise to a standard lemons problem, whereby portfolio lenders use private information to liquidate lower quality loans in commercial mortgage-backed securities (CMBS) markets. Conduit lenders, who originate loans for direct sale into securitization markets, mitigate problems of asymmetric information and adverse selection in loan sales. Our theory provides an explanation for the pricing puzzle observed in CMBS markets, whereby conduit CMBS loans are priced higher than portfolio loans, despite widespread belief that conduit loans are originated at lower quality. Consistent with theoretical predictions of a lemons discount, our empirical analysis of 141 CMBS deals and 16,760 CMBS loans shows that, after controlling for observable determinants of loan pricing, conduit loans enjoyed a 34 basis points pricing advantage over portfolio loans in the CMBS market.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 100 (2011)
Issue (Month): 2 (May)
Pages: 304-325

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Handle: RePEc:eee:jfinec:v:100:y:2011:i:2:p:304-325

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: CMBS Conduit lending Asymmetric information Lemons discount;

References

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Citations

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Cited by:
  1. Andrew Felton & Joseph B Nichols, 2012. "Welcome remarks," BIS Papers chapters, in: Bank for International Settlements (ed.), Commercial real estate loan performance at failed US banks, volume 64, pages 19-24 Bank for International Settlements.
  2. Frank Packer & Timothy Riddiough, 2012. "Securitisation and the Commercial Property Cycle," RBA Annual Conference Volume, in: Alexandra Heath & Frank Packer & Callan Windsor (ed.), Property Markets and Financial Stability Reserve Bank of Australia.
  3. Gene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2010. "Complex mortgages," Working Paper Series WP-2010-17, Federal Reserve Bank of Chicago.
  4. Lamont K. Black & Chenghuan Sean Chu & Andrew Cohen & Joseph B. Nichols, 2011. "Differences across originators in CMBS loan underwriting," Finance and Economics Discussion Series 2011-05, Board of Governors of the Federal Reserve System (U.S.).
  5. Jun Chen & Yongheng Deng, 2013. "Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans," The Journal of Real Estate Finance and Economics, Springer, vol. 46(4), pages 609-632, May.
  6. James Kau & Donald Keenan & Constantine Lyubimov & V. Slawson, 2012. "Asymmetric Information in the Subprime Mortgage Market," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 67-89, January.
  7. Xudong An & Yongheng Deng & Joseph Nichols & Anthony Sanders, 2013. "Local Traits and Securitized Commercial Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 47(4), pages 787-813, November.
  8. Agarwal, Sumit & Chang, Yan & Yavas, Abdullah, 2012. "Adverse selection in mortgage securitization," Journal of Financial Economics, Elsevier, vol. 105(3), pages 640-660.

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