Originator Performance, CMBS Structures and Yield Spreads of Commercial Mortgages

Abstract

This paper examines information and incentive problems that can exist in the market for conduit mortgages, which are commercial mortgages placed in pools that are repackaged and sold as CMBS. We find that conduit mortgages that are originated by institutions with negative stock price performance in the quarters just prior to the origination date tend to have higher credit spreads and default more than other mortgages with similar characteristics. This evidence is consistent with reputation models that suggest that poorly performing originators have less incentive to expend resources evaluating the credit quality of prospective borrowers. We also find that the originator/performance effect is stronger when the originator of the mortgage is also the lead underwriter of the CMBS and that the time between the origination date and the CMBS offering is shorter for originators that are stock price losers.

Keywords: securitization, CMBS, credit spreads, mortgages, reputation

JEL Classification: G14, G21