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Loss Recoveries, Realized Excess Returns, and Credit Rationing in the Commercial Mortgage Market

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  • Brian Ciochetti

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  • James Shilling

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    Abstract

    In this paper we exploit loan level data combining foreclosure histories with information about the revenues and expenses associated with the ongoing management and eventual sale of financially distressed loans to estimate the magnitude of realized excess returns on commercial mortgages. Our findings are striking. We find that average realized excess returns on commercial mortgages are the lowest at the best times á la Stiglitz and Weiss (Am. Econ. Rev., 71:393–409, 1981). We also find that excess realized returns on commercial mortgages are low when lenders are swamped with funds (which we measure by the volume of commercial mortgage commitments) and when promised spreads are low. Copyright Springer Science+Business Media, LLC 2007

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    File URL: http://hdl.handle.net/10.1007/s11146-007-9021-2
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    Bibliographic Info

    Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

    Volume (Year): 34 (2007)
    Issue (Month): 4 (May)
    Pages: 425-445

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    Handle: RePEc:kap:jrefec:v:34:y:2007:i:4:p:425-445

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    Web page: http://www.springerlink.com/link.asp?id=102945

    Related research

    Keywords: Asset pricing; Information and market efficiency; Mortgages; G12; G14; G21;

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    References

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    1. Terrence M. Clauretie, 1987. "The Impact of Interstate Foreclosure Cost Differences and the Value of Mortgages on Default Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(3), pages 152-167.
    2. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc.
    3. 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.
    4. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
    5. Episcopos, Athanasios & Pericli, Andreas & Hu, Jianxun, 1998. "Commercial Mortgage Default: A Comparison of Logit with Radial Basis Function Networks," The Journal of Real Estate Finance and Economics, Springer, vol. 17(2), pages 163-78, September.
    6. 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.
    7. 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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