Commercial Mortgage Termination and Pricing: Theory and Evidence from 1970 to 2015

Abstract

Commercial mortgage delinquency and default rates increased to unprecedented levels during the 2007–2009 financial crisis. Traditional credit risk models and underwriting models failed to adequately predict the increase in nonperforming loans resulting from precipitous price declines in an increasing number of commercial properties. These effects, in turn, spilled over into the commercial mortgage-backed securities (CMBSs) market. In this paper, we provide a comprehensive analysis of many topics relating to commercial mortgages, including (1) the determinants of mortgage termination and loss severity, (2) the pricing of commercial mortgages and CMBSs, and (3) the role of special servicers. Our synthesis of the extant commercial real estate literature can be useful to borrowers, originators, underwriters, investors, regulators, and policymakers, especially in relation to developing improved credit risk models and better lending standards.