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Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans

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  • Jun Chen
  • Yongheng Deng

Abstract

The existing literature in commercial mortgage defaults focuses on the process for loans in the current status to the default status. This study recognizes that commercial mortgage default is not a one-step process and examines a previously unexplored aspect in the whole default process, that is the stage between the initial delinquency to default. In the analysis of the conditional default risk during this stage, we distinguish the servicers’ behavior from the borrowers’ behavior and consequently break our empirical analysis into two parts. A multinomial logit model is applied to analyze the servicers’ choice of workout options and a proportional hazard model is applied to analyze the borrower’s default decision making process under time-varying conditions. Using the data sample that consists of 493 special serviced loans in 144 CMBS deals, we find that cash flow condition is the most significant factor in the servicers’ decision making process. We also find that borrowers make default decisions based upon both the equity position in the mortgage and the cash flow condition in the space market. In addition, key real estate space market variables, such as market-level vacancy rates, also provide useful information in explaining commercial mortgage defaults. Finally, we find that special service seems to be functioning as it reduces the probability that a troubled loan will default.

Suggested Citation

  • Jun Chen & Yongheng Deng, 2003. "Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans," Working Paper 8614, USC Lusk Center for Real Estate.
  • Handle: RePEc:luk:wpaper:8614
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    References listed on IDEAS

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    Cited by:

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    2. Seow Ong & Tien Sing & Alan Teo, 2007. "Delinquency and Default in Arms: The Effects of Protected Equity and Loss Aversion," The Journal of Real Estate Finance and Economics, Springer, vol. 35(3), pages 253-280, October.
    3. Geetesh Bhardwaj & Rajdeep Sengupta, 2008. "Where's the smoking gun? a study of underwriting standards for US subprime mortgages," Working Papers 2008-036, Federal Reserve Bank of St. Louis.
    4. David Downs & Pisun (Tracy) Xu, 2015. "Commercial Real Estate, Distress and Financial Resolution: Portfolio Lending Versus Securitization," The Journal of Real Estate Finance and Economics, Springer, vol. 51(2), pages 254-287, August.
    5. Daxuan Zhao & Yonglin Wang & Tien Foo Sing, 2019. "Impact of Foreclosure Laws on Mortgage Loan Supply and Performance," The Journal of Real Estate Finance and Economics, Springer, vol. 58(2), pages 159-200, February.
    6. Tracey Seslen & William C. Wheaton, 2010. "Contemporaneous Loan Stress and Termination Risk in the CMBS Pool: How “Ruthless” is Default?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(2), pages 225-255, June.
    7. Nijskens, Rob & Mokas, Dimitris, 2019. "Credit Risk in Commercial Real Estate Bank Loans : The Role of Idiosyncratic versus Macro-Economic Factors," Other publications TiSEM ea4f2f0e-dc50-4987-91d3-6, Tilburg University, School of Economics and Management.
    8. Kavussanos, Manolis G. & Tsouknidis, Dimitris A., 2016. "Default risk drivers in shipping bank loans," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 94(C), pages 71-94.
    9. Lok Man Michel Tong & Gianluca Marcato, 2018. "Modelling Competitive Mortgage Termination Option Strategies: Default vs Restructuring and Prepayment vs Defeasance," ERES eres2018_300, European Real Estate Society (ERES).
    10. Yingjin Hila Gan & Christopher Mayer, 2006. "Agency Conflicts, Asset Substitution, and Securitization," NBER Working Papers 12359, National Bureau of Economic Research, Inc.

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