Is COVID Revealing a CMBS Virus?

75 Pages Posted: 23 Aug 2020

See all articles by John M. Griffin

John M. Griffin

University of Texas at Austin - Department of Finance

Alex Priest

University of Texas at Austin - Department of Finance

Date Written: August 10, 2020

Abstract

Commercial loan valuations crucially depend on accurate loan income, but we find that underwritten income is commonly overstated when compared to actual property income. Consistent with these differences being purposeful, income overstatement varies widely and consistently across originators, is priced by originators, predictable ex-ante, and accompanied by clear inflation of past financials. Income overstatement is highly predictive of pre- and COVID-period loan distress, even after controlling for loan characteristics and geographic and time fixed effects. We document appraisal aggressiveness and abnormally low capitalization rates that are also related to current distress. Overall, aggressive CMBS underwriting practices appear to be revealing themselves in the current crisis.

Keywords: Commercial Mortgages, Commercial Mortgage Backed Securities, Income Overstatement

JEL Classification: G21, G23, R30

Suggested Citation

Griffin, John M. and Priest, Alex, Is COVID Revealing a CMBS Virus? (August 10, 2020). Available at SSRN: https://ssrn.com/abstract=3671162 or http://dx.doi.org/10.2139/ssrn.3671162

John M. Griffin (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6621 (Phone)

HOME PAGE: http://www.jgriffin.info

Alex Priest

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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