Local Traits and Securitized Commercial Mortgage Default

Posted: 15 Nov 2013

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

Joseph Nichols

Board of Governors of the Federal Reserve System

Anthony B. Sanders

George Mason University - School of Business

Date Written: November 12, 2013

Abstract

We expand on the standard commercial mortgage default model and create a new model by looking beyond the usual factors of option value, insolvency, property type, region, originator type, state foreclosure laws and macroeconomic measures. The new model incorporates measures of local economic conditions, specifically MSA-level commercial property market conditions, county level unemployment, and local home price appreciation. We estimate our new model using a dataset containing the performance histories of over 30,000 CMBS loans that were originated between 1998 and 2012. We find that those local trait variables affect the default rate of CMBS loans significantly and provide improved explanatory power over the standard model. We further explore the impact of local home price measures by comparing the explanatory power of lagged and contemporaneous home price indexes, comparing the power of home price indexes at the state, county, and zip-code level, examining the interaction of home price indexes with commercial property type, looking at the impact of home price indexes over time, and at the impact of introducing local commercial land price indexes. We find that local residential house price-related measures provide a high quality and high frequency signal of local market conditions.

Keywords: Default risk; CMBS loan; Local trait; Hazard model

JEL Classification: G21, G12, C41

Suggested Citation

An, Xudong and Deng, Yongheng and Nichols, Joseph and Sanders, Anthony Bown, Local Traits and Securitized Commercial Mortgage Default (November 12, 2013). Journal of Real Estate Finance and Economics, Vol. 47, No. 4, 2013. Available at SSRN: https://ssrn.com/abstract=2353420

Xudong An (Contact Author)

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

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Yongheng Deng

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

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)

Anthony Bown Sanders

George Mason University - School of Business ( email )

Fairfax, VA 22030
United States

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