Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans

NUS Institute of Real Estate Studies Working Paper IRES2010-011

39 Pages Posted: 6 Jun 2003 Last revised: 18 Mar 2012

See all articles by Jun Chen

Jun Chen

Property & Portfolio Research, Inc.

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Date Written: March 10, 2012

Abstract

This study recognizes that commercial mortgage default is not a one-step process and examines a previously under explored aspect in the whole default process, that is the stage between the initial delinquency and default. We distinguish the servicers’ behavior from the borrowers’ behavior. A multinomial logit model is applied to analyze the servicers’ choice of workout options and a proportional hazard model is applied to analyze the borrower’s default decision-making process under time-varying conditions. We find that cash flow condition is the most significant factor in the servicers’ decision making process. We also find that borrowers make default decisions based upon both the equity position in the mortgage and the cash flow condition in the space market. Key real estate space market variables, such as market-level vacancy rates, also provide useful information in explaining commercial mortgage defaults. We find that special service seems to be successful in reducing the probability that a troubled loan will default. Finally, sensitivity analysis shows nontrivial economic significance of the impact of explanatory variables, real estate market variables in particular have the most significant impact on the pricing of special-serviced loans.

Keywords: default risk, CMBS loan, special service, workout strategy, hazard model, logit model

Suggested Citation

Chen, Jun and Deng, Yongheng, Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans (March 10, 2012). NUS Institute of Real Estate Studies Working Paper IRES2010-011. Available at SSRN: https://ssrn.com/abstract=398980 or http://dx.doi.org/10.2139/ssrn.398980

Jun Chen

Property & Portfolio Research, Inc. ( email )

Boston, MA 02108
United States
617-426-4446 (Phone)
617-426-4443 (Fax)

Yongheng Deng (Contact Author)

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

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