Differences across originators in CMBS loan underwriting
AbstractDifferences in the organizational structure of CMBS loan originators may reflect differences in the incentives they face for underwriting risky loans. We treat an originator's type--that is, commercial bank, investment bank, insurance company, finance company, conduit lender, or foreign-owned entity--as a proxy for incentives related to warehousing risk, balance sheet lending, and regulatory constraints. After controlling for observable credit characteristics of over 30,000 loans securitized into CMBS after 1999, we find considerable differences in loan performance across originator types. The results suggest that moral hazard--captured by lack of warehousing risk-negatively affected the quality of loans underwritten by conduit lenders. On the other hand, despite opportunities for adverse selection, balance sheet lenders--commercial banks, insurance companies and finance companies--actually underwrote higher quality loans.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-05.
Date of creation: 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-05 (All new papers)
- NEP-BAN-2011-02-05 (Banking)
- NEP-CTA-2011-02-05 (Contract Theory & Applications)
- NEP-IAS-2011-02-05 (Insurance Economics)
- NEP-URE-2011-02-05 (Urban & Real Estate Economics)
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- Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
- An, Xudong & Deng, Yongheng & Gabriel, Stuart A., 2011. "Asymmetric information, adverse selection, and the pricing of CMBS," Journal of Financial Economics, Elsevier, vol. 100(2), pages 304-325, May.
- 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, vol. 27(1), pages 5-23, July.
- Keys, Benjamin J. & Mukherjee, Tanmoy & Seru, Amit & Vig, Vikrant, 2009. "Financial regulation and securitization: Evidence from subprime loans," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 700-720, July.
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