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Commercial Mortgage Defaults: Proportional Hazards Estimation Using Individual Loan Histories

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  • Kerry D. Vandell
  • Walter Barnes
  • David Hartzell
  • Dennis Kraft
  • William Wendt

Abstract

This paper examines the theory of commercial mortgage default and tests it using a data set of 2,899 loan histories provided by a major multi-line insurance company. A default model is estimated which relates subsequent default incidence and timing to contemporaneous loan term, borrower, property and economic/market conditions. Maximum likelihood estimation is used to estimate a hazard function predicting conditional probability of default over time. Results confirm many expected default relationships, in particular the dominance of loan terms and property value trends over time in affecting default. The effectiveness of the model in discriminating between "good" and "bad" loans is explored. Implications for underwriting practice and credit risk diversification are noted. Finally, suggestions are made for extending these results in pricing applications. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:reesec:v:21:y:1993:i:4:p:451-480
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    References listed on IDEAS

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    Cited by:

    1. Carlos Pestana Barros & Zhongfei Chen & Luis A. Gil-Alana, 2012. "Housing sales in urban Beijing," Applied Economics, Taylor & Francis Journals, vol. 44(34), pages 4495-4504, December.
    2. Xudong An & John Clapp & Yongheng Deng, 2010. "Omitted Mobility Characteristics and Property Market Dynamics: Application to Mortgage Termination," The Journal of Real Estate Finance and Economics, Springer, vol. 41(3), pages 245-271, October.
    3. Grovenstein, Robert A. & Harding, John P. & Sirmans, C.F. & Thebpanya, Sansanee & Turnbull, Geoffrey K., 2005. "Commercial mortgage underwriting: How well do lenders manage the risks?," Journal of Housing Economics, Elsevier, vol. 14(4), pages 355-383, December.
    4. Jun Chen & Yongheng Deng, 2013. "Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans," The Journal of Real Estate Finance and Economics, Springer, pages 609-632.
    5. Lamont Black & Chenghuan Chu & Andrew Cohen & Joseph Nichols, 2012. "Differences Across Originators in CMBS Loan Underwriting," Journal of Financial Services Research, Springer;Western Finance Association, pages 115-134.
    6. An, Xudong & Deng, Yongheng & Sanders, Anthony B., 2006. "Subordinations Levels in Structured Financing," Working Paper Series 2006-18, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    7. Varli, Yusuf & Yildirim, Yildiray, 2015. "Default and prepayment modelling in participating mortgages," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 81-88.
    8. Austin Kelly, 2004. "Modeling the Credit Risk in Agricultural Mortgages: A Critical Review of the Farm Credit Administration’s Credit Risk Model for Farmer Mac," Finance 0409001, EconWPA.
    9. 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.).
    10. Deniz Igan & Marcelo Pinheiro, 2010. "Exposure to Real Estate in Bank Portfolios," Journal of Real Estate Research, American Real Estate Society, vol. 32(1), pages 47-74.
    11. repec:kap:jrefec:v:55:y:2017:i:1:d:10.1007_s11146-016-9548-1 is not listed on IDEAS
    12. 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.
    13. Luis C. Mejia, 1999. "Availability of Credit and Loan Default: A Look at the Commercial Mortgage Supply Cycle," Journal of Real Estate Research, American Real Estate Society, vol. 18(1), pages 175-196.
    14. Brian Ciochetti & James Shilling, 2007. "Loss Recoveries, Realized Excess Returns, and Credit Rationing in the Commercial Mortgage Market," The Journal of Real Estate Finance and Economics, Springer, vol. 34(4), pages 425-445, May.
    15. George H. Lentz & Ko Wang, 1998. "Residential Appraisal and the Lending Process: A Survey of Issues," Journal of Real Estate Research, American Real Estate Society, vol. 15(1), pages 11-40.
    16. Xudong An & Yongheng Deng & Joseph Nichols & Anthony Sanders, 2013. "Local Traits and Securitized Commercial Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 47(4), pages 787-813, November.
    17. John M. Clapp & Yongheng Deng & Xudong An, 2006. "Unobserved Heterogeneity in Models of Competing Mortgage Termination Risks," Real Estate Economics, American Real Estate and Urban Economics Association, pages 243-273.
    18. 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.
    19. Marcelo Pinheiro & Deniz O Igan, 2009. "Exposure to Real Estate Losses; Evidence from the US Banks," IMF Working Papers 09/79, International Monetary Fund.
    20. Xudong An & Yongheng Deng & Joseph Nichols & Anthony Sanders, 2015. "What is Subordination About? Credit Risk and Subordination Levels in Commercial Mortgage-backed Securities (CMBS)," The Journal of Real Estate Finance and Economics, Springer, vol. 51(2), pages 231-253, August.
    21. Hoon Cho & Brian Ciochetti & James Shilling, 2013. "Are Commercial Mortgage Defaults Affected by Tax Considerations?," The Journal of Real Estate Finance and Economics, Springer, vol. 46(1), pages 1-23, January.
    22. Driessen, Joost & Van Hemert, Otto, 2012. "Pricing of commercial real estate securities during the 2007–2009 financial crisis," Journal of Financial Economics, Elsevier, vol. 105(1), pages 37-61.
    23. Tracey Seslen & William C. Wheaton, 2005. "Contemporaneous Loan Stress and Termination Risk in the CMBS pool: how "Ruthless" is default?," Working Paper 8582, USC Lusk Center for Real Estate.
    24. Jonathan B. Dressler, 2010. "Survival analysis and mortgage termination at AgChoice ACA," Agricultural Finance Review, Emerald Group Publishing, vol. 70(1), pages 21-36, May.
    25. Deng, Yongheng & Quigley, John M. & Sanders, Anthony B., 2006. "Commercial Mortgage-backed Securities (CMBS) Terminations, Regional and Property-Type Risk," Working Paper Series 2006-24, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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