Complexity and Loan Performance: Evidence from the Securitization of Commercial Mortgages
Kellogg School of Management
June 30, 2013
In the years preceding the recent financial crisis, issuances of commercial mortgage backed securities (CMBS) varied noticeably in their complexity. Analyzing a sample of approximately 40,000 commercial mortgage loans serving as the collateral for 334 CMBS deals issued between 2001 and 2007, I examine the relationship between deal complexity and loan performance. Controlling for observable loan characteristics, subsequent movements in commercial property prices, and the identities of key institutions involved in the deal, I find that loan performance is worse for loans packaged in more complex securitizations. At the same time, neither the price of a deal’s securities nor a deal’s risk retention (i.e. skin in the game) reflected that complexity correlates with lower loan quality. These findings present a puzzle for current theories of optimal security design.
Number of Pages in PDF File: 48
Keywords: complexity, securitization, CMBS
JEL Classification: G14, G21, G23working papers series
Date posted: November 4, 2010 ; Last revised: September 27, 2013
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