2003
Abstract:
The existing literature in commercial mortgage defaults focuses on the process for loans in the
current status to the default status. This study recognizes that commercial mortgage default is not
a one-step process and examines a previously unexplored aspect in the whole default process, that
is the stage between the initial delinquency to default. In the analysis of the conditional default
risk during this stage, we distinguish the servicers’ behavior from the borrowers’ behavior and
consequently break our empirical analysis into two parts. A multinomial logit model is applied to
analyze the servicers’ choice of workout options and a proportional hazard model is applied to
analyze the borrower’s default decision making process under time-varying conditions. Using the
data sample that consists of 493 special serviced loans in 144 CMBS deals, we find that cash flow
condition is the most significant factor in the servicers’ decision making process. We also find
that borrowers make default decisions based upon both the equity position in the mortgage and
the cash flow condition in the space market. In addition, key real estate space market variables,
such as market-level vacancy rates, also provide useful information in explaining commercial
mortgage defaults. Finally, we find that special service seems to be functioning as it reduces the
probability that a troubled loan will default.
