Value Creation Through Securitization: Evidence from the CMBS Market

Abstract

Despite recent volatility and constraints in secondary market funding, analysts have ascribed substantial value creation to the securitization of commercial mortgages. Such value creation likely emanates from enhancements to originator liquidity, tranching of claims on cash-flows, gains from specialization in origination, servicing, and holding of mortgages, regulatory arbitrage, and the like. Indeed, such value creation would be consistent with past accelerated growth in the mortgage- and asset-based securities markets and the substantial profits earned by secondary market intermediaries. In this paper, we estimate the pricing effects of commercial mortgage securitization. We do so by applying loan level data from 1992 - 2003 to compare the pricing of conduit and portfolio loans held in CMBS structures. In contrast to portfolio loans, which are held for investment by originating institutions, conduit loans are originated for the sole purpose of sale and securitization in the secondary market. If securitization creates value, it should be evidenced in the relative pricing of conduit loans sold into CMBS pools and in a lower cost of capital to loan originators. We estimate a reduced-form model, in which the interest rate spread between commercial mortgages and comparable-maturity treasury securities varies with loan characteristics, capital market conditions, and conduit loan status. Estimation results indicate that securitization of conduit loans leads to an 11 basis points reduction in commercial mortgage interest rates. We assess robustness of results via hazard model tests for omitted variables and originator-specific effects. We further estimate a simultaneous equations model that accounts for the potential endogenity of mortgage loan terms to the mortgage-treasury rate spread. Results of that analysis suggest a larger 20 basis points reduction in loan pricing among loans sold into CMBS structures.