Contemporaneous Loan Stress and Termination Risk in the CMBS Pool: How Ruthless is Default?

Seslen, Tracey; Wheaton, William C.

doi:10.2139/ssrn.823524

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Contemporaneous Loan Stress and Termination Risk in the CMBS Pool: How Ruthless is Default?

36 Pages Posted: 12 Oct 2005

See all articles by Tracey Seslen

Tracey Seslen

University of Southern California - Marshall School of Business - Finance and Business Economics Department; University of Washington - Michael G. Foster School of Business

William C. Wheaton

Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: September 2005

Abstract

This study analyzes the impact of contemporaneous loan stress on the termination of loans in the commercial mortgage-backed securities pool using a novel measure, based on changes in net operating incomes and property values at the MSA-property type-year level. Employing a semi-parametric competing risks model for a variety of specifications, we find that the probability of default is extremely low at very high levels of stress, even though the coefficient estimates of greatest interest are very statistically significant. These results suggest substantial lender forbearance and a possible reluctance to foreclose, and are consistent with previous literature which models the incidence of default as "gradual" rather than "ruthless" once it is "in the money".

Keywords: Commercial mortgages, competing risks, mortgage termination

JEL Classification: G21, R33, C41

Suggested Citation: Suggested Citation

Seslen, Tracey N. and Wheaton, William C., Contemporaneous Loan Stress and Termination Risk in the CMBS Pool: How Ruthless is Default? (September 2005). Available at SSRN: https://ssrn.com/abstract=823524 or http://dx.doi.org/10.2139/ssrn.823524