Default Risk of CMBS Loans: What Explains the Regional Variations?

40 Pages Posted: 6 Sep 2010

See all articles by Xudong An

Xudong An

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Anthony B. Sanders

George Mason University - School of Business

Date Written: August 28, 2010

Abstract

We find substantial regional variations in CMBS loan default rates based on a 10-year history of nearly 38,000 CMBS loans. We seek to explain those variations with well documented risk factors such as negative equity, insolvency, property type, originator and state foreclosure law, as well as some newly introduced factors such as local unemployment rate, loan covenant (lock out) and natural disaster (Katrina). Many of the aforementioned factors are significant for CMBS loan default risk and they help explain part of the regional variations in CMBS loan default rate. We also find a significant negative relationship between local residential real estate appreciation and CMBS loan default – those regions with higher house price appreciation rates have lower default risk in CMBS loans. Moreover, differences in MSA-level residential real estate appreciation rate add explanatory power of the regional variations in CMBS loan risk, even though they do not fully explain the regional risk. Our findings have important implications for the CMBS investment community.

Keywords: default risk, CMBS loan, regional variation, hazard model, martingale residual

JEL Classification: G21, G12, C41

Suggested Citation

An, Xudong and Deng, Yongheng and Sanders, Anthony Bown, Default Risk of CMBS Loans: What Explains the Regional Variations? (August 28, 2010). Available at SSRN: https://ssrn.com/abstract=1672367 or http://dx.doi.org/10.2139/ssrn.1672367

Xudong An

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Yongheng Deng (Contact Author)

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://https://bus.wisc.edu/faculty/yongheng-deng

Anthony Bown Sanders

George Mason University - School of Business ( email )

Fairfax, VA 22030
United States

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