Commercial Mortgage Delinquency, Foreclosure and Reinstatement

contemporaneous loan-to-value ratio and the interest rate were positive and significant. The debtcoverage ratio was not significant, but the value at loan origination was used, not thecontemporary value. The property type and the borrower type also had significant effects.Vandell argues that the significance of the borrower type is evidence that transaction costs havean influence on default.There has been a recent explosion in work on the empirical estimation of commercialmortgage default, including Ciochetti et al (2002), Ambrose and Sanders (2001), Archer et al.(2002), Chun and Deng (2002) and Goldberg and Capone (2002). These studies differ in theirdata sources, estimation technologies, set of independent variables and definition of default.The current study uses data from a single large commercial mortgage lender, as doesCiochetti et al. (2002), although they use a different, American firm. Other studies usecommercial mortgage backed securities data (Ambrose and Sanders (2001) and Chun and Deng(2002)) or multifamily mortgages (Archer et al. (2002) and Goldberg and Capone (2002)).The critical independent variable suggested by option theory is a measurement of theborrower’s equity, the loan-to-value ratio. Goldberg and Capone’s (2002) findings suggest thatcash flow considerations, measured as the debt coverage ratio, also play a role in default. Archeret al. (2002) and Ambrose and Sanders (2001) both confirm the lack of a relationship betweeninitial loan-to-value ratio and default, while Ciochetti et al. (2002) find that contemporaneousloan-to-value ratio and debt coverage ratio are significantly positive and negative, respectively.Other variables used as independent variables in these studies include borrower characteristics,property location and market conditions. This research is the first to consider the presence of aguarantee.In most of these studies, a mortgage is considered to be in default at the time when theloan terminates through foreclosure. 1But work by Ambrose and co-authors explicitly recognizethat default and foreclosure are not synonymous. In Ambrose and Capone (1996), costs and1 An exception is Archer et al. (2002) who define default as 90-days delinquent.4