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Foreclosure of Securitized Commercial Mortgages—A Model of the Special Servicer

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  • Peng Liu
  • Daniel Quan

Abstract

The decision to foreclose on a CMBS mortgage is made by the special servicer. A mortgage loan is in special servicing when it is either delinquent or in a state of imminent default. A special servicer should represent the interests of the underlying CMBS bondholders by returning the highest possible value to the investors. In this paper, we show that a special servicer’s compensation structure results in an incentive for her to extend a loan beyond the time desired by its bondholders. We develop a model and demonstrate how compensation incentives interact and influence a special servicer’s foreclosure decisions. Our model takes into consideration the dynamic nature of such a decision by viewing is as a dynamic programming problem whereby foreclosure represents a discrete terminal state of an optimal stopping problem. This model thus captures the trade-off between continuation of a loan and termination and we use this model to determine how the stopping rule changes under various compensation structures. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Peng Liu & Daniel Quan, 2013. "Foreclosure of Securitized Commercial Mortgages—A Model of the Special Servicer," The Journal of Real Estate Finance and Economics, Springer, vol. 46(2), pages 321-338, February.
    • Handle: RePEc:kap:jrefec:v:46:y:2013:i:2:p:321-338
    DOI: 10.1007/s11146-011-9337-9
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    1. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    2. Brian A. Ciochetti & Yongheng Deng & Bin Gao & Rui Yao, 2002. "The Termination of Commercial Mortgage Contracts through Prepayment and Default: A Proportional Hazard Approach with Competing Risks," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(4), pages 595-633.
    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, December.
    4. David T. Brown & Brian A. Ciochetti & Timothy J. Riddiough, 2006. "Theory and Evidence on the Resolution of Financial Distress," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1357-1397.
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    Cited by:

    1. Walter D'Lima & Luis Arturo Lopez, 2021. "Trustee affiliation and servicer oversight: Evidence from CMBS markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(3), pages 699-732, September.

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