Commercial Mortgage Delinquency, Foreclosure and Reinstatement

finding suggests that it is possible for commercial mortgage loan servicers to distinguish amongthe potential outcomes of delinquent loans.5. Conclusion and ExtensionsAn innovation in this paper is to consider the models for delinquency and delinquencyoutcome separately. This is justified since the outcome of delinquency is not foregone –reinstatement is a more frequent resolution than foreclosure. The empirical models are estimatedusing a database from a single lender, with particularly accurate values for the loan-to-value ratioand the debt coverage ratio.The results of the empirical estimations have implications for lenders’ monitoringfunctions. Lenders should use the critical variables of loan-to-value ratio, debt coverage ratio andguarantee to identify expected delinquent loans. Within this pool of delinquent loans, these samecharacteristics can be used to predict the outcome, which could be reinstatement or foreclosure.An important contribution of this paper is to demonstrate that the loan-to-value ratio, debtcoverage ratio and guarantee differ in a statistically significant way across these outcomes.This paper is also the first to examine the guarantee variable, and despite issues related toendogeneity and difficulty in realization on the guarantee, it was found to be consistentlystatistically significant, both in prediction of delinquency and in distinguishing among thereinstatement and foreclosure outcomes of delinquency.Planned extensions of this paper include the formalization of the two-stage conceptualmodel of the default process, as well as robustness checks for the results in light of restructuringmodifications, post-renewal defaults and prepayments.13