Loan Modifications and the Commercial Real Estate Market

71 Pages Posted: 16 Aug 2022

See all articles by David Glancy

David Glancy

Board of Governors of the Federal Reserve System

Robert J. Kurtzman

Board of Governors of the Federal Reserve System

Lara Loewenstein

Federal Reserve Bank of Cleveland

Multiple version iconThere are 2 versions of this paper

Date Written: August, 2022

Abstract

Banks modify more CRE loans than CMBS, contributing to better loan performance when property incomes decline. However, banks have higher delinquency rates for less-stressed loans, consistent with modification policies encouraging strategic default. Motivated by these facts, we develop a tradeoff theory model in which lenders vary in their modification technologies. Modification frictions discourage strategic renegotiation, enabling CMBS to offer higher LTV loans and attract borrowers seeking higher leverage. The model produces cross-lender differences in LTVs and spreads consistent with the data. Reducing modification frictions at CMBS decreases welfare by restricting debt capacity for the borrowers that value it most.

Keywords: Commercial real estate, Modifications, LTV

JEL Classification: R33, G21, G22, G23

Suggested Citation

Glancy, David and Kurtzman, Robert J. and Loewenstein, Lara, Loan Modifications and the Commercial Real Estate Market (August, 2022). FEDS Working Paper No. 2022-50, Available at SSRN: https://ssrn.com/abstract=4190437 or http://dx.doi.org/10.17016/FEDS.2022.050

David Glancy (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/view/davidglancy

Robert J. Kurtzman

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Lara Loewenstein

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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