Defaults and Losses on Commercial Real Estate Bonds during the Great Depression Era

44 Pages Posted: 10 Feb 2012

See all articles by Tyler Wiggers

Tyler Wiggers

affiliation not provided to SSRN

Adam B. Ashcraft

Federal Reserve Bank of New York

Date Written: February 1, 2012

Abstract

We employ a unique data set of public commercial real estate (CRE) bonds issued during the Great Depression era (1920-32) to determine their frequency of default and total loss given default. Default rates on these bonds far exceeded those originated in subsequent periods, driven in part by the greater economic stress of the Depression as well as the lower level of financial sophistication of investors and structures that prevailed in 1920-32. Our results confirm that making loans with higher loan-to-value ratios results in higher rates of default and loss. They also support the business cycle’s significance to the performance of CRE assets. Despite the large number of defaults in the early 1930s, the losses, which typically occurred after 1940, are comparable to those for contemporary loans, largely due to the rapid recovery of the economy from the Depression. This finding has relevance today, as numerous entities have a large amount of sub-performing CRE assets to work out. While the data point to better loss performance the quicker a problem loan is worked out, this may not hold true when there is a rapid recovery around the corner.

Keywords: Great Depression, CMBS market, default and loss study, commercial real estate

JEL Classification: G10, N22

Suggested Citation

Wiggers, Tyler and Ashcraft, Adam B., Defaults and Losses on Commercial Real Estate Bonds during the Great Depression Era (February 1, 2012). FRB of New York Staff Report No. 544. Available at SSRN: https://ssrn.com/abstract=2002078 or http://dx.doi.org/10.2139/ssrn.2002078

Tyler Wiggers

affiliation not provided to SSRN ( email )

Adam B. Ashcraft (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045-0001
United States
212-720-1617 (Phone)
212-720-8363 (Fax)

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