Determinants of Multifamily Mortgage Default

Abstract

Option-based models of mortgage default posit that the central measure of default risk is the loan-to-value (LVT) ratio. We argue, however, that an unrecognized problem with extending the basic option model to exisiting multifamily and commercial mortgages is that key variables in the option model are endogenous to the loan origination and property sale process. This endogeneity implies, amoung other things, that no emperical relation may be observed between default and LTV. This is because lenders may require lower LTVs in order to mitigate risk so mortgages with low and moderate LTVs may be as likely to default as those with high LTVs. Mindful of this risk endogeneity and its emperical implications, we examine the default experience of 9,639 multifamily mortgage loans securitized by the Resolution Trust Corporation (RTC) and the Federal Deposit Insurance Corporation (FDIC) during the period 1991-1996. The extensive nature of the data supports multivariate analysis of default incidence in a number of respects not possible in previous studies.