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Commercial Mortgage-backed Securities (CMBS) Terminations, Regional and Property-Type Risk

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  • Deng, Yongheng

    (U of Southern California)

  • Quigley, John M.

    (U of California, Berkeley)

  • Sanders, Anthony B.

    (Ohio State U)

Abstract

Option theory predicts that mortgage default or prepayment will be exercised if the call or put option is “in the money.” We extend our analysis to commercial mortgages using data from commercial mortgage-backed securities (CMBS). The paper presents a model of the competing risks of mortgage termination (default and prepayment) using data from commercial mortgage-backed securities (CMBS) deals. Our results show that the option model explains both default and prepayment for commercial mortgages. We find that loan specific variables (such as loan-to-value ratio, debt service coverage ratio, loan-rate spread and prepayment prevention) are important explanatory variables for both default and prepayment. We also find that default and prepayment vary across regions of the country; given that regional economies do not move in perfect lock-step, we would expect there to be cross-sectional variation in default rates. However, the degree of variation across regions in terms of prepayments is not as predictable. The largest differences are across property types, both in terms of default and prepayment risk.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2006/2006-24.pdf
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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2006-24.

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Date of creation: Oct 2006
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Handle: RePEc:ecl:ohidic:2006-24

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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, American Real Estate and Urban Economics Association, vol. 21(4), pages 451-480.
  2. Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  3. Kau, James B, et al, 1990. "Pricing Commercial Mortgages and Their Mortgage-Backed Securities," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 3(4), pages 333-56, December.
  4. Ambrose, Brent W & Sanders, Anthony B, 2003. "Commercial Mortgage-Backed Securities: Prepayment and Default," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 26(2-3), pages 179-96, March-May.
  5. Ciochetti, Brian A, et al, 2003. "A Proportional Hazards Model of Commercial Mortgage Default with Originator Bias," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 27(1), pages 5-23, July.
  6. Kerry D. Vandell, 1992. "Predicting Commercial Mortgage Foreclosure Experience," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 20(1), pages 55-88.
  7. Lawrence Goldberg & Charles A. Capone, Jr., 2002. "A Dynamic Double-Trigger Model of Multifamily Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 30(1), pages 85-113.
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