Delinquencies, Default and Borrowers' Strategic Behavior toward the Modification of Commercial Mortgages

Abstract

This article constructs a model of mortgage delinquency which tests the extent to which borrowers anticipate a loan modification resulting from such a delinquency. Using a sample of modified loans from commercial mortgage‐backed securities (CMBS), we estimate the present value of modified cash flows and project modification benefits each month for all CMBS loans which serve to proxy for a borrower's anticipation of a beneficial modification. Our results confirm a borrower's anticipation of a modification increases the delinquency hazard, and supports the theory that borrower delinquency is strategically endogenous.

Commercial Mortgage‐Backed Security Pricing with Real Estate Liquidity Risk

“…Mooradian and Pichler (2016) develop a model of mortgage and service contracts and show that forming a nondiversified pool preserves pool‐wide information, avoids the cost of an incentive compatible servicer contract, and may increase mortgage‐backed security value. Another strand of research investigates the issues related to the pricing, default risk, or subordination of CMBS (see Esaki (2002), Titman and Tsyplakov (2010), Stanton and Wallace (2018), and Buschbom, Kau, Keenan and Lyubimov (2018)). Our article complements these papers by focusing on the effects of liquidity frictions on the pricing and performance of commercial mortgages.…”