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Contemporaneous Loan Stress and Termination Risk in the CMBS pool: how "Ruthless" is default?

Tracey Seslen and William C. Wheaton
This study analyzes the impact of contemporaneous loan stress on the termination of loans in the commercial mortgage-backed securities pool using a novel measure, based on changes in net operating incomes and property values at the MSA-property type-year level. Employing a semi-parametric competing risks model for a variety of specifications, we find that the probability of default is extremely low even at very high levels of stress, even though the point estimates of greatest interest are very statistically significant. These results suggest substantial lender forbearance and a possible reluctance to foreclose, and are consistent with previous literature measuring/modeling the incidence of default where such option is "in the money".