Commercial Mortgage Terminations: Evidence from CMBS
22 Pages Posted: 11 Mar 2005
Date Written: December 2004
Option theory predicts that mortgage default or prepayment will be exercised if the call or put option is "in the money." We extend our analysis to commercial mortgages using data from commercial mortgage-backed securities. The paper presents a model of the competing risks of mortgage termination (default and prepayment) using data from commercial mortgage-backed securities (CMBS) deals.
Our results show that the option model explains both default and prepayment for commercial mortgages. We find that loan specific variables (such as loan-to-value ratio, debt service coverage ratio, loan-rate spread and prepayment prevention) are important explanatory variables for both default and prepayment. We also find that default and prepayment vary rather dramatically across regions of the country; given that regional economies do not move in perfect lock-step, we would expect there to be cross-sectional variation in default rates. However, the degree of variation across regions in terms of prepayments is not as predictable.
JEL Classification: R33, G21
Suggested Citation: Suggested Citation