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Loss-given-default on farm real estate loans: probability of full recovery

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  • Yan Yan
  • Peter J. Barry
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    Abstract

    The non-depreciability characteristic of farmland value implies that farm delinquencies and default may not necessarily lead to loan loss. Considering this, a model under the framework of Value-at-Risk is developed to estimate probabilities of debt coverage by farmland that is mortgaged to secure a loan. Loss-given-default (LGD) under collateral risk is conceptualized and empirical estimation of land values considering time pattern and uncertainty is proposed. Given different economic situations, the probabilities of full recovery of loan balances under both loan-level and portfolio specifications are estimated using USDA data from selected states and regions. Results indicate that farmland pledged as collateral is expected to cover the loan balance with relatively high probability.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

    Volume (Year): 66 (2006)
    Issue (Month): 1 (May)
    Pages: 47-59

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    Handle: RePEc:eme:afrpps:v:66:y:2006:i:1:p:47-59

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    Related research

    Keywords: Collateral risk; Farm real estate; Loss-given-default; Recovery rates;

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