Commercial Real Estate, Distress and Financial Resolution: Portfolio Lending Versus Securitization

Abstract

This paper examines the contrasting influence of portfolio lending and securitization in the resolution of distressed commercial real estate. The empirical analysis utilizes a large and unique data set of distressed commercial mortgages. The data set is constructed based on the recent financial crisis and includes portfolio and securitized loans. The main hypotheses address the marginal impact of portfolio versus securitized loans on the likelihood of resolution, resolution outcome, time to resolution and capital recovery rates. Conditional on a loan becoming troubled, we find that distressed commercial real estate loans held in a portfolio are more likely to be resolved and experience higher foreclosure rates compared to those that are securitized. Furthermore, portfolio loans experience shorter time to resolution and higher capital recovery rates when resolution is relatively swift. Our study is intended to contribute to the growing literature on distressed asset resolution and to provide new perspectives on how different lending options impact the financial resolution and workout process in a distressed commercial mortgage market.

Intermediary Segmentation in the Commercial Real Estate Market

“…Most relevant to this paper, there is a literature studying the competition between banks and capital markets in the context of the CRE market. Downs and Xu (2015) find that banks are much quicker to resolve distressed loans than CMBS. Black et al (2017Black et al ( , 2018 show that banks specialize in lending against risky properties where monitoring and renegotiation are important.…”

Intermediary Segmentation in the Commercial Real Estate Market

“…Most relevant to this paper, there is a literature studying the competition between banks and capital markets in the context of the CRE market. Downs and Xu (2015) find that banks are much quicker to resolve distressed loans than CMBS. Black et al (2017Black et al ( , 2018 show that banks specialize in lending against risky properties where monitoring and renegotiation are important.…”

“…Black et al (2017Black et al ( , 2018 use the same data sources for CMBS and bank loan portfolios, but their analysis does not include life insurers. Downs and Xu (2015) and Ghent and Valkanov (2016) use data which includes insurers but does not come from regulatory filings, causing many fields pertaining to loan 4 There is a large theoretical and empirical literature on this topic. Important examples include: Townsend (1979); Sharpe (1990); Diamond (1991); Rajan (1992); Hart and Moore (1998); Denis and Mihov (2003); Gande and Saunders (2012); Hale and Santos (2009) ;Becker and Ivashina (2014).…”

Safe Collateral, Arm's-Length Credit: Evidence from the Commercial Real Estate Mortgage Market

“…3 Our focus on commercial real estate is most closely related to Ghent and Valkanov (2013) and Downs and Xu (2014), who also examine the differences in portfolio and securitized CRE loans. 4 In some models, the borrower hides output in the nondefault states in order to induce renegotiation.…”