Differences Across Originators in CMBS Loan Underwriting

35 Pages Posted: 19 Mar 2011

See all articles by Lamont Black

Lamont Black

DePaul University - Driehaus College of Business; Center for Financial Services

Chenghuan Sean Chu

Federal Reserve Board of Governors

Andrew Milman Cohen

Board of Governors of the Federal Reserve System

Joseph Nichols

Board of Governors of the Federal Reserve System

Date Written: January 22, 2011

Abstract

There is considerable heterogeneity in the organizational structures of CMBS loan originators and in their incentives for underwriting risky loans. We treat an originator's organizational type - commercial bank, investment bank, insurance company, finance company, conduit lender, or foreign-owned entity - as a proxy for incentives related to warehousing risk and balance-sheet lending. After controlling for observable credit characteristics of over 30,000 loans securitized into CMBS since 1999, we find considerable differences in loan performance across originator types. The results suggest that moral hazard - captured by lack of warehousing risk - negatively affected the quality of loans underwritten by conduit lenders. On the other hand, despite the potential for engaging in adverse selection, balance-sheet lenders - commercial banks, insurance companies and finance companies - actually underwrote higher-quality loans.

Keywords: Commercial Mortgage Backed Securities, Organizational Type, Moral Hazard

JEL Classification: G21, G32, D82

Suggested Citation

Black, Lamont and Chu, Chenghuan Sean and Cohen, Andrew Milman and Nichols, Joseph, Differences Across Originators in CMBS Loan Underwriting (January 22, 2011). Available at SSRN: https://ssrn.com/abstract=1786755 or http://dx.doi.org/10.2139/ssrn.1786755

Lamont Black (Contact Author)

DePaul University - Driehaus College of Business ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-5617 (Phone)
312-362-6566 (Fax)

HOME PAGE: http://driehaus.depaul.edu/faculty-and-staff/faculty/Pages/black-lamont.aspx

Center for Financial Services

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://https://business.depaul.edu/about/centers-institutes/financial-services/Pages/default.aspx

Chenghuan Sean Chu

Federal Reserve Board of Governors ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andrew Milman Cohen

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Joseph Nichols

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2983 (Phone)

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