Commercial Mortgage Delinquency, Foreclosure and Reinstatement

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enefits to various alternatives to foreclosure on residential mortgages are modeled andparameterized. They find that multiple alternatives can be optimal, including foreclosure andrestructuring, depending on factors such as the interest-rate environment and movement of houseprices. Ambrose and Buttimer (2000) modify the boundary conditions of the mortgage pricingmodel to include the value of the right to reinstate a mortgage in delinquency, and Ambrose andCapone (1998) empirically examine the effect of the loan, property and borrower characteristicson the eventual outcome of a residential mortgage in default. Gardner and Mills (1989) andSpringer and Waller (1993) are other papers that recognize and study the distinction betweendelinquency and foreclosure.Chun and Deng (2002) examine the workout strategy decisions of commercial mortgagebacked securities special servicers on loans that are 60-days delinquent. They find that cash flowconsiderations are relevant. This study differs from the present one in that they are not concernedwith the eventual outcome of the mortgage, but with whether or not the loan receives arestructuring modification.3. DataA major Canadian commercial mortgage lender provided the dataset used in the empiricalestimation. Observations are monthly, from November 1996 to May 2001, with three months ofmissing data, for a total of 52 months. In the first observation, there were 1,126 active loans, andeach month new loans were added and some loans terminated. A total of 1,637 loans are presentfor at least one month during the observation window.Every loan is secured by commercial property in Canada. The differences between theAmerican and Canadian commercial mortgage systems and regulations are not substantial. InCanada, the incidence of a personal or corporate guarantee may be higher. The competitivemarket structure is different in that the Canadian market is dominated by a small number of large,5
national lenders, of which the data supplier is one. But most importantly, foreclosure laws,prepayment clauses and rules governing delinquency are comparable across the two countries.All the loans by this lender are fixed-rate mortgages with a fixed term that usually rangesbetween 1 year and 30 years, with the most common terms being 5 years, 10 years and 20 years.Most loans have a term shorter than the amortization period, so a balloon payment is usually dueat maturity. Approximately 95% of the loans are amortizing with monthly payments of principaland interest, with the remainder making interest-only payments either monthly or annually.The lender has a standard clause in the mortgage contract prohibiting early repayment 2 .However, the company policy is to accept early repayment when it is accompanied with a penaltylarge enough so that the lender can maintain the contract yield by substituting Canadiangovernment bonds. This is identical to yield maintenance penalties observed in the U.S. exceptthat the discount rate is the Canadian government bond yield, not the current mortgage rate. Thispenalty is sufficiently severe so that the economic incentive to refinance through prepayment isremoved. There were 190 loans that prepaid during the observation window, of which 181 wereclassified as never delinquent and 9 of which were delinquent but then reinstated/prepaid.The key variables of interest are the loan’s delinquency status, and the eventual outcomeof the delinquency. A loan is classified as “delinquent” if a payment is 90-days past due at leastonce during the observation window. Of the 1637 loans observed, 214 were delinquent. Table 1provides a diagram of the default process, and the number of loans with each outcome. Of the214 delinquent loans, 103 were not delinquent at the end of the observation window. These areclassified as “reinstated”. 71 loans were foreclosed or the equivalent. 3The remaining 40 loansare unresolved at the end of the observation window – no foreclosure or equivalent has been2 Some loans originated before the mid-1970s may have a clause in their contract specifying some otherprepayment penalty, such as 6 months interest.3 Any outcome where the lender becomes the legal owner of the secured property is classified as aforeclosure equivalent. The most common alternative is the voluntary transfer of title (“deed-in-lieu”).6
Page 1 and 2: Commercial Mortgage Delinquency, Fo
Page 3 and 4: Perhaps the most compelling reason
Page 5: contemporaneous loan-to-value ratio
Page 9 and 10: Whenever a property appraisal is pe
Page 11 and 12: loans and the highest value for for
Page 13 and 14: atio, debt coverage ratio and guara
Page 15 and 16: ReferencesAmbrose, Brent W., Buttim
Page 17 and 18: Titman, Sheridan D.; Torous, Walter
Page 19 and 20: Table 3Independent Variable: Ever D
Page 21 and 22: Table 4b - Loan OutcomeNever Delinq
Page 23 and 24: 1 IntroductionCommercial mortgages
Page 25 and 26: Based on the results from the first
Page 27 and 28: An early paper about the empirical
Page 29 and 30: 4 DataIn order to test the multiple
Page 31 and 32: To derive the excess returns, the r
Page 33 and 34: examining bond returns. Second, sin
Page 35 and 36: significant for 3 series. The growt
Page 37 and 38: ReferencesBlack, Fischer; Jenson, M
Page 39 and 40: Ibbotson, R. G.; Siegel, L. B.; Rea
Page 41 and 42: Appendix 1 - Unsmoothing Real Estat
Page 43 and 44: Figure 1Commercial Mortgage Returns
Page 45 and 46: Table 1 - List of FactorsVariable D
Page 47 and 48: Table 3 - CorrelationsReturn Series
Page 49 and 50: Table 5 - Test for Equality of Coef
Page 51 and 52: Table 6b - Estimation results for S
Page 53 and 54: Table 7 - Estimation results for Bo

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