Timing, Loss Recovery and Economic Performance of Foreclosed Commercial Mortgages

Abstract

This paper examines 480 commercial mortgages that have completed the process of foreclosure, with specific focus on measuring time-to-foreclosure, loss recovery and realized investment performance. We find that the average delinquency-foreclosure time period is slightly greater than one year and that net loss recovery is approximately 70 percent of the outstanding loan balance. Differences in state foreclosure law are found to significantly impact the time-to-foreclosure and loan performance. Average yield degradation is 5.4 percent on foreclosed loans. The impact of these losses on required yield premia are generally consistent with loan spreads observed in the marketplace. The evidence also broadly supports default timing and loss recovery predictions made by option-based approaches to debt valuation.

JEL Classification: G21, R20