Commercial Mortgage Delinquency, Foreclosure and Reinstatement

loans and the highest value for foreclosed loans; the values are 67%, 80% and 118%. The debtcoverage ratio also shows the same monotonic pattern, with the values for the three categoriesequal to 154%, 134% and 85%. For both variables, the foreclosed loans have the “worst” averagevalues, while the never delinquent loans are “best” and the reinstated loans are in-between.The same pattern also holds for the interest rate, the outstanding balance and the spread.For all three variables, the foreclosed loans have the highest average value and never delinquentloans have the lowest. Among the property types and locations, only Ontario shows a pattern,with 35% of the never delinquent loans in Ontario, 45% of the reinstated loans and 54% of theforeclosed loans. For the guarantee variable, the never delinquent loans and the reinstated loanshave the same proportion, about 88%. But only 67% of foreclosed loans have a guarantee. Whilethese patterns are suggestive, multivariate analysis is necessary to determine whether theserelationships are significant.4. Methodology and ResultsThe first estimation models delinquency status and uses the probit methodology. Thesingle-failure proportional hazards estimation method has been used by other authors, such asVandell et al. (1993), but it is not appropriate for use in this paper since the timeframe is tooshort. This was confirmed by tests using failure defined as the first time delinquency wasobserved for the loan. The log hazard ratio function was not constant over time, indicating thatproportional hazard methodology is not appropriate.Instead, the probit methodology was employed, which estimatesprobability (90-day delinquency i = 1) = F(X i β),where F(.) is the standard normal distribution and X i are the independent variables that includethe loan-to-value ratio, the debt-coverage ratio and the incidence of a guarantee.10