Complexity and Loan Performance: Evidence from the Securitization of Commercial  Mortgages

Furfine, Craig

doi:10.2139/ssrn.1702297

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Complexity and Loan Performance: Evidence from the Securitization of Commercial Mortgages

Review of Corporate Finance Studies 2014, vol. 2 no. 2, pp. 154-187

52 Pages Posted: 4 Nov 2010 Last revised: 30 Aug 2014

See all articles by Craig Furfine

Craig Furfine

Kellogg School of Management - Department of Finance

Date Written: 2014

Abstract

Between 2001 and 2007, the complexity of commercial mortgage-backed securities (CMBS) increased substantially. The median size of commercial mortgage loan pools tripled and the median number of AAA-rated tranches doubled. I examine whether deal complexity is related to loan performance by analyzing a sample of approximately 40,000 commercial mortgage loans from 334 CMBS deals. I find that loan performance is worse for loans in more complex securitizations. However, neither the price of a deal’s securities nor a deal’s risk retention reflected that complexity correlates with lower loan quality. These findings present a challenge for theories of optimal security design.

Keywords: complexity, securitization, CMBS

JEL Classification: G14, G21, G23

Suggested Citation: Suggested Citation

Furfine, Craig, Complexity and Loan Performance: Evidence from the Securitization of Commercial Mortgages (2014). Review of Corporate Finance Studies 2014, vol. 2 no. 2, pp. 154-187, Available at SSRN: https://ssrn.com/abstract=1702297 or http://dx.doi.org/10.2139/ssrn.1702297