Is COVID Revealing a CMBS Virus?
75 Pages Posted: 23 Aug 2020
Date Written: August 10, 2020
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: Suggested Citation