Commercial Real Estate, Distress and Financial Resolution: Portfolio Lending versus Securitization

Abstract

This paper examines the contrasting influence of portfolio lending and securitization in the resolution of distressed commercial real estate. The empirical analysis utilizes a large and unique data set of distressed commercial mortgages. The data set is constructed based on the recent financial crisis and includes portfolio and securitized loans. The main hypotheses address the marginal impact of portfolio versus securitized loans on the likelihood of resolution, resolution outcome, time to resolution and capital recovery rates. Conditional on a loan becoming troubled, we find that distressed commercial real estate loans held in a portfolio are more likely to be resolved and experience higher foreclosure rates compared to those that are securitized. Furthermore, portfolio loans experience shorter time to resolution and higher capital recovery rates when resolution is relatively swift. Our study is intended to contribute to the growing literature on distressed asset resolution and to provide new perspectives on how different lending options impact the financial resolution and workout process in a distressed commercial mortgage market.

Keywords: Commercial real estate; Distressed debt; Securitization; Financial resolution

JEL Classification: D8, G1, R33