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Availability of Credit and Loan Default: A Look at the Commercial Mortgage Supply Cycle

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    Abstract

    This study uses a structural equation approach to assess the presence of a credit supply effect in the commercial mortgage market and the lenders' ability to incorporate expectations about this effect into their lending policies. A credit supply effect is defined as the effect of mortgage supply on the level of loan defaults. The empirical analysis shows two important results. First, changes in loan defaults appear to be followed by changes in commercial mortgage supply with a lag of approximately four to five years. Second, lenders tend to behave myopically, failing to incorporate expectations about the credit supply effect into their lending policies. Additionally, a simulation suggests that adequate timing of the mortgage supply cycle is crucial in limiting the incidence of mortgage default.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol18n01/v18p175.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 18 (1999)
    Issue (Month): 1 ()
    Pages: 175-196

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    Handle: RePEc:jre:issued:v:18:n:1:1999:p:175-196

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    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    1. Kerry D. Vandell & Walter Barnes & David Hartzell & Dennis Kraft & William Wendt, 1993. "Commercial Mortgage Defaults: Proportional Hazards Estimation Using Individual Loan Histories," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 451-480.
    2. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March.
    3. Brent W. Ambrose & John Benjamin & Peter Chinloy, 1996. "Credit Restrictions and the Market for Commercial Real Estate Loans," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(1), pages 1-22.
    4. Duane B. Graddy & Reuben Kyle & Thomas H. Strickland, 1994. "The Differential Effects Of Deregulation On Savings And Loan Associations And Banks," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(2), pages 289-300, 06.
    5. Ramon P. DeGennaro & Larry H.P. Lang & James B. Thomson, 1993. "Troubled Savings and Loan Institutions: Turnaround Strategies Under Insolvency," Financial Management, Financial Management Association, vol. 22(3), Fall.
    6. Hillier, Brian & Ibrahimo, M V, 1993. "Asymmetric Information and Models of Credit Rationing," Bulletin of Economic Research, Wiley Blackwell, vol. 45(4), pages 271-304, October.
    7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    8. Waldo L. Born & Stephen A. Pyhrr, 1994. "Real Estate Valuation: The Effect of Market and Property Cycles," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 9(4), pages 455-486.
    9. Kerry D. Vandell, 1992. "Predicting Commercial Mortgage Foreclosure Experience," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(1), pages 55-88.
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    Cited by:
    1. Kamhon Kan & Sunny Kai-sun Kwong & Charles Ka-yui Leung, 2002. "The Dynamics and Volatility of Commercial and Residential Property Prices: Theory and Evidence," Departmental Working Papers _147, Chinese University of Hong Kong, Department of Economics.
    2. Ron Donohue & Patric H. Hendershott, 2004. "Fund Flows and Commercial Real Estate Investment: Evidence from the Commercial Mortgage Market," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 26(4), pages 417-442.
    3. Bradford Case, 2003. "Loss characteristics of commercial real estate loan portfolios," Basel II White Paper 1, Board of Governors of the Federal Reserve System (U.S.).

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