Commercial Mortgage Delinquency, Foreclosure and Reinstatement

atio, debt coverage ratio and guarantee have the same sign and significance.However, thecoefficients in the foreclosure case are larger, in an absolute value sense. The implication of thisresult is that if a lender is attempting to discern which loans will become delinquent and whichwill become foreclosed, it is largely a matter of degree, since the same variables are involved inthe two cases. Loans with more extreme values (in the worst direction) would be those morelikely to be foreclosed. This idea is tested more rigorously in the next set of estimations.The second goal of this paper is to distinguish among the potential outcomes ofdelinquent loans. Since there are multiple potential outcomes, a multinomial logit model isemployed. Loan i can have one of k outcomes. For each mortgage loanPr( i ∈j)=ke∑j = 1XβjeXβkfor all k outcomes. X is the vector of independentvariables and β j are the coefficients reported in the table.The three possible outcomes for a delinquent loan are foreclosure, reinstatement or theoutcome can be unresolved at the end of the observation window. The results that are reported intable 4a are relative to reinstatement, which is the excluded outcome. Only delinquent loans areused in this estimation, so the results are conditional on the loan being delinquent. In order toaddress a selection bias that may arise from the exclusion of the never delinquent loans, table 4breports another set of estimations performed based on all loans and four potential outcomes:never delinquent, foreclosed, reinstated and unresolved. Again, the excluded outcome isreinstatement. The results are similar in the three-outcome and four-outcome estimations.Relative to the likelihood of being reinstated, the probability of a delinquent loan beingforeclosed is positively related to the loan-to-value ratio and negatively related to the debtcoverage ratio and the guarantee. For all three variables, these signs correspond to thosepredicted by option-theory with the presence of a guarantee viewed as a transaction cost. These12