Commercial Mortgage Research Articles

Old Second Bancorp., Inc. (Aurora, ILL.)

Mergent's Dividend AchieversVolume 3, Issue 3 p. 207-207 U.S. Dividend Achievers Old Second Bancorp., Inc. (Aurora, ILL.)† First published: 30 June 2006 https://doi.org/10.1002/div.4433 † Contact: : William B. Skoglund — Chmn., Pres., C.E.O. Address: : 37 South River Street, Aurora, IL 60507-4172 Web Site: : www.o2bancorp.com AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Abstract Commercial Banking (MIC: 8.1 SIC: 6022 NAIC: 522110) Old Second Bancorp is a bank holding company. Through its subsidiaries, Co. provides financial services through its twenty-three banking locations and four mortgage banking offices located in Kane, Kendall, DeKalb, DuPage, Lake and LaSalle counties in Illinois. Co.'s primary deposit products are checking, savings, and certificates of deposit, and its primary lending products are residential and commercial mortgages, construction lending, commercial and installment loans. A major portion of loans are secured by various forms of collateral including real estate, business assets, consumer property, and other items. At Dec 31 2005, Co. had total assets of $2.37 billion. Volume3, Issue3Summer 2006Pages 207-207 RelatedInformation

Old Second Bancorp., Inc. (Aurora, ILL.)

Mergent's Dividend AchieversVolume 3, Issue 2 p. 208-208 U.S. Company Reports Old Second Bancorp., Inc. (Aurora, ILL.)† First published: 20 April 2006 https://doi.org/10.1002/div.4016 † Contact: : William B. Skoglund — Chmn., Pres., C.E.O. Address: : 37 South River Street, Aurora, IL 60507-4172 Web Site: : www.o2bancorp.com AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract Commercial Banking (MIC: 8.1 SIC: 6022 NAIC: 522110) Old Second Bancorp is a bank holding company. Through its subsidiaries, Co. provides financial services through its twenty-three banking locations and four mortgage banking offices located in Kane, Kendall, DeKalb, DuPage, Lake and LaSalle counties in Illinois. Co.'s primary deposit products are checking, savings, and certificates of deposit, and its primary lending products are residential and commercial mortgages, construction lending, commercial and installment loans. A major portion of loans are secured by various forms of collateral including real estate, business assets, consumer property, and other items. At Dec 31 2005, Co. had total assets of $2.37 billion. Volume3, Issue2Spring 2006Pages 208-208 RelatedInformation

Valuing the Defeasance Option in Securitized Commercial Mortgages

To protect the interests of investors, commercial mortgage loans pooled for the issuance of commercial mortgage-backed securities (CMBS) have restrictive covenants that discourage the borrower from refinancing. Such restrictions limit the borrower's ability to access any accumulated equity. The predominant means of accessing this equity today is defeasance. By defeasing a loan, the borrower substitutes the commercial mortgage with U.S. Treasury or agency obligations whose payments match those of the defeased mortgage. Therefore, defeasance is an exchange option whereby the borrower gives up the portfolio of Treasury or agency securities and in return receives the market value of the commercial mortgage plus the liquidity benefits arising from accessing the accumulated equity in the underlying property. The value of the option to defease is shown to depend critically on the rate of return that can be earned on the released equity, prevailing interest rate conditions, as well as the option's contractual features.

Determinants of Credit Spreads in Commercial Mortgages

This article examines the cross-sectional and time-series determinants of commercial mortgage credit spreads as well as the terms of the mortgages. Consistent with theory, our empirical evidence indicates that mortgages on property types that tend to be riskier and have greater investment flexibility exhibit higher spreads. The relationship between the loan-to-value (LTV) ratio and spreads is relatively weak, which is probably due to the endogeneity of the LTV choice. However, the average LTV ratio per lender has a strong positive relation with credit spreads, which is consistent with the idea that lenders specialize in mortgages with either high or low levels of risk, and that high LTV mortgages require substantially higher spreads. Finally, we observe that spreads widen and mortgage terms become stricter after periods of poor performance of the real estate markets and after periods of greater default rates of outstanding real estate loans.

Innovations in Mortgage Modeling: An Introduction

∗This special issue presents a selection of recent methodological advances in the academic literature on mortgage performance and valuation. The articles include a range of modeling techniques from rational structural models applied to pool-level data and loan-level reduced-form, or behavioral, models of prepayment and default. Both classes of model are shown to be effective for evaluating innovations in contracting such as defeasance options in commercial mortgage contracts and hybrid residential mortgage products. Finally, the articles highlight a number of important methodological linkages between recent advances in mortgage modeling and those found in the valuation of other forms of risky debt such as corporate bonds. The structural models presented here focus on pricing and modeling credit or call events that are specific to a particular class of borrower. These models focus on the underlying dynamics of interest rates and the assets that are the collateral on the mortgage. Credit (or call) events are triggered by random movements in the asset price relative to a threshold that is the exercise price on the option. By modeling credit or call events in terms of the underlying dynamics of asset prices and/or interest rates, the structural methodology functionally links option exercise events to the underlying fundamentals faced by the borrower. These articles build upon an extensive literature with a corporate debt focus: Leland (1994), Jarrow and Turnbull (1995), Longstaff and Schwartz (1995), Leland and Toft (1996), Anderson and Sundaresan (2000), Collin-Dufresne and Goldstein (2001) and Huang and Huang (2002), among many others. They also build upon important prior structural mortgage models including Dunn and McConnell (1981a,b), Timmis (1985), Johnston and van Drunen (1988), Kau et al. (1992), Stanton (1995), Kau et al. (1995) and Kau and Slawson (2002), among many others. In contrast, reduced-form, or behavioral, approaches, do not explicitly model the value of the borrower’s assets and capital structure. Instead credit and/or

Commercial mortgage underwriting: How well do lenders manage the risks?

Loan-to-value ratio and debt service coverage ratios have long been viewed as the two most important quantitative measures of the default risk of commercial mortgages. Option-based models of default provide strong theoretic support for the importance of original loan-to-value ratio. The same theoretical predictions have found strong empirical support in residential single-family mortgage analyses. However, recent empirical studies of commercial mortgage default have raised questions about the role of loan-to-value ratio in assessing the riskiness of commercial mortgages. These studies generally either find no relationship or a puzzling negative relationship between loan-to-value ratio and default. This paper uses a very large database of commercial loan histories to thoroughly investigate this issue. It finds strong evidence that loan-to-value and debt service coverage ratios are endogenous to the underwriting process. Lenders react to other—unmeasured—risk factors with credit rationing and pricing. As a result, unusually low loan-to-value ratio loans appear to have above average risk in other dimensions and their default probabilities are equal to or higher than average. The results show that the pricing spread that lenders establish as part of the underwriting process serves as an excellent summary measure of the riskiness of the loan. A test of lenders’ ability to appropriately price loan-to-value risk finds that, while there is some unpriced effect of loan-to-value ratio after controlling for the lender’s pricing, introducing lender pricing into the model removes the otherwise puzzling negative loan-to-value and default relationship previously observed in the literature.

Why Real Estate?

Real estate for institutional investors is most broadly defined to comprise private commercial real estate equity, private commercial real estate debt, public real estate equity structured as real estate investment trusts or real estate operating companies, and public commercial real estate debt structured as commercial mortgage–backed securities. Arguments made in a 2003 Special Real Estate Issue of this Journal for adding real estate to a well–managed institutional investment portfolio include: portfolio diversification and risk reduction, absolute return enhancement, inflation hedging, reflection of the investment universe, and strong cash flows. A revisit of these portfolio issues and an updated empirical analysis continue to support the rationale for real estate. Particular challenges face institutional investors who invest in real estate; the articles in this 2005 Special Real Estate Issue address them.

Who Bears the Balloon Risk in Commercial MBS?

Much of the literature on the pricing of commercial mortgages underlying commercial mortgage-backed securities pools focuses on the effect of term default (default during the term of the loan), and ignores the possibility of balloon risk, the borrower9s inability to pay off the mortgage at maturity through refinancing or property sale. A contingent-claims mortgage pricing model that includes two default triggers—a cash flow trigger and an asset value trigger—may be used to assess the effect of balloon risk on the pricing of CMBS tranches. Simulations of cash flows for individual loans in a CMBS framework reveal how individual tranches are affected by balloon risk. Balloon risk is low at the whole-loan level, but under a number of scenarios total credit risk and balloon risk creep into investment-grade CMBS tranches and significantly impact their valuation.

Marshall & Ilsley Corp.

AbstractCommercial Banking (MIC: 8.1 SIC: 6021 NAIC: 522110)Marshall & Ilsley, a multibank holding company with assets of $40.40 billion as of Dec 31 2004, is headquartered in Milwaukee, WI. Co. has 196 banking offices in Wisconsin, 34 locations throughout Arizona, 12 offices in Minnesota, six offices in Missouri, two offices in Florida, one office in Nevada and one office in Illinois, as well as on the Internet. Co. also provides trust services, residential mortgage banking, capital markets, brokerage and insurance, commercial leasing and commercial mortgage banking. Co.'s principal subsidiary is Metavante Corporation, a provider of integrated financial transaction processing, outsourcing services, software, and consulting services.

Marshall & Ilsley Corp.

AbstractCommercial Banking (MIC: 8.1 SIC: 021 NAIC: 22110)Marshall & Ilsley, a multibank holding company with assets of $40.40 billion as of Dec 31 2004, is headquartered in Milwaukee, WI. Co. has 196 banking offices in Wisconsin, 34 locations throughout Arizona, 12 offices in Minnesota, six offices in Missouri, two offices in Florida, one office in Nevada and one office in Illinois, as well as on the Internet. Co. also provides trust services, residential mortgage banking, capital markets, brokerage and insurance, commercial leasing and commercial mortgage banking. Co.'s principal subsidiary is Metavante Corporation, a provider of integrated financial transaction processing, outsourcing services, software, and consulting services.

Commercial Mortgage Terminations: Evidence from CMBS

Option theory predicts that mortgage default or prepayment will be exercised if the call or put option is the money. We extend our analysis to commercial mortgages using data from commercial mortgage-backed securities. The paper presents a model of the competing risks of mortgage termination (default and prepayment) using data from commercial mortgage-backed securities (CMBS) deals. Our results show that the option model explains both default and prepayment for commercial mortgages. We find that loan specific variables (such as loan-to-value ratio, debt service coverage ratio, loan-rate spread and prepayment prevention) are important explanatory variables for both default and prepayment. We also find that default and prepayment vary rather dramatically across regions of the country; given that regional economies do not move in perfect lock-step, we would expect there to be cross-sectional variation in default rates. However, the degree of variation across regions in terms of prepayments is not as predictable.

Commercial Mortgage Backed Securities: How Much Subordination is Enough?

The commercial mortgage-backed security market has experienced rapid growth in recent years, but relatively little academic research has questioned the apparent success of the CMBS capital structure. In this paper, we study whether the recent growth in the CMBS market actually reflects the mitigation of a market imperfection, as some have suggested, or reflects ever thinner subordination levels, perhaps backed up by overly aggressive assumptions about future commercial real estate performance. Preliminary results from our analysis based on a multi-factor structural model of expected commercial mortage defaults indicate that, somewhat surprisingly, the optimal levels of subordination are lower than those observed in recent CMBS deals. One interpretation of these results is that, in the absence of a performance track record for securitized commercial mortgages, the subordination levels of early deals were set too high. Under this interpretation, our results imply that in the future the CMBS market will likely see further reductions in subordination and continued rapid growth. An indirect implication of this conclusion is that the CMBS capital structure does create value.

Chemical Financial Corp.

AbstractCommercial Banking (MIC: 8.1 SIC: 6022 NAIC:522110)Chemical Financial is a bank holding company headquartered in Midland, MI, with total assets of $3.71 billion as of Dec 31 2003. Co.'s four subsidiary banks, CB&T, Chemical Bank Shoreline, Chemical Bank West and State Bank of Caledonia, operate 133 branch offices and two loan production offices throughout 33 counties in the lower peninsula of Michigan. Non‐bank subsidiaries include CFC Financial Services, an insurance company operating under the assumed names Chemical Financial Insurance Agency and CFC Investment Centers, and CFC Title Services, an issuer of title insurance to buyers and sellers of residential and commercial mortgage properties.

Marshall & Ilsley Corp.

AbstractCommercial Banking (MIC: 8.1 SIC: 6021 NAIC:522110)Marshall & Ilsley, a multibank holding company with assets of $34.40 billion as of Dec 31 2003, is headquartered in Milwaukee, WI. Co. has 199 banking offices in Wisconsin, 28 locations throughout Arizona, 11 offices in Minnesota, six offices in Missouri, two offices in Florida, one office in Nevada and one office in Illinois, as well as on the Internet. Co. also provides trust services, residential mortgage banking, capital markets, brokerage and insurance, commercial leasing and commercial mortgage banking. Co.'s principal subsidiary is Metavante Corporation, a provider of integrated financial transaction processing, outsourcing services, software, and consulting services.

Best practices in commercial real estate financing insurance and commercial mortgages in the new world of risk

Understanding the basics of commercial property insurance and how changes to the terrorism risk and insurance act will affect the insurance industry.

Marshall & Ilsley Corp.

Mergent's Dividend AchieversVolume 2, Issue 2 p. 169-169 U.S. Company Report Marshall & Ilsley Corp.† First published: 22 April 2005 https://doi.org/10.1002/div.2340 † Contact: : Dennis J. Kuester — Chmn., Pres., C.E.O. Address: : 770 North Water Street, Milwaukee, WI 53202 Web Site: : www.micorp.com AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Abstract Commercial Banking (MIC: 8.1 SIC: 021 NAIC: 22110) Marshall & Ilsley, a multibank holding company with assets of $34.40 billion as of Dec 31 2003, is headquartered in Milwaukee, WI. Co. has 199 banking offices in Wisconsin, 28 locations throughout Arizona, 11 offices in Minnesota, six offices in Missouri, two offices in Florida, one office in Nevada and one office in Illinois, as well as on the Internet. Co. also provides trust services, residential mortgage banking, capital markets, brokerage and insurance, commercial leasing and commercial mortgage banking. Co.'s principal subsidiary is Metavante Corporation, a provider of integrated financial transaction processing, outsourcing services, software, and consulting services. Volume2, Issue2Spring 2005Pages 169-169 RelatedInformation

Chemical Financial Corp.

Mergent's Dividend AchieversVolume 2, Issue 2 p. 51-51 U.S. Company Report Chemical Financial Corp.† First published: 22 April 2005 https://doi.org/10.1002/div.2222 † Contact: : Frank P. Popoff — Chmn. Address: : 333 East Main Street, Midland, MI 48640-0569 Web Site: : www.chemicalbankmi.com AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract Commercial Banking (MIC: 8.1 SIC: 022 NAIC: 22110) Chemical Financial is a bank holding company headquartered in Midland, MI, with total assets of $3.71 billion as of Dec 31 2003. Co.'s four subsidiary banks, CB&T, Chemical Bank Shoreline, Chemical Bank West and State Bank of Caledonia, operate 133 branch offices and two loan production offices throughout 33 counties in the lower peninsula of Michigan. Non-bank subsidiaries include CFC Financial Services, an insurance company operating under the assumed names Chemical Financial Insurance Agency and CFC Investment Centers, and CFC Title Services, an issuer of title insurance to buyers and sellers of residential and commercial mortgage properties. Volume2, Issue2Spring 2005Pages 51-51 RelatedInformation

Commercial Mortgage Underwriting: How Well Do Lenders Manage the Risks?

Loan-to-value ratio and debt service coverage ratios have long been viewed as the two important quantitative measures of the default risk of commercial mortgages. Option-based models of default provide strong theoretic support for the importance of original loan-to-value ratio. The same theoretical predictions have found strong empirical support in residential single-family mortgage analyses. However, recent empirical studies of commercial mortgage default have raised questions about the role of loan-to-value ratio in assessing the riskiness of commercial mortgages. These studies generally either find no relationship or a puzzling negative relationship between loan-to-value ratio and default. In this paper, we use a very large data base of commercial loan histories to thoroughly investigate this issue. We find strong evidence that loan-to-value ratio (and debt service coverage ratio) is endogenous to the underwriting process. Lenders react to other (unmeasured) risk factors by a combination of credit rationing (lowering the loan amount) and pricing. As a result, unusually low loan-to-value ratio loans appear to have above average risk in other dimensions and their default probabilities are equal to or higher than average. We find that the pricing spread that lenders establish as part of the underwriting process serves as an excellent summary measure of the riskiness of the loan. We test the effectiveness of lenders' ability to appropriately price loan-to-value risk and find that, on average, there is no unpriced effect of loan-to-value ratio after controlling for the lender's pricing.

Marshall & Ilsley Corp.

AbstractCommercial Banking (MIC: 8.1 SIC: 6021 NAIC:522110)Marshall & Ilsley, a multibank holding company with assets of $34.40 billion as of Dec 31 2003, is headquartered in Milwaukee, WI. Co. has 199 banking offices in Wisconsin, 28 locations throughout Arizona, 11 offices in Minnesota, six offices in Missouri, two offices in Florida, one office in Nevada and one office in Illinois, as well as on the Internet. Co. also provides trust services, residential mortgage banking, capital markets, brokerage and insurance, commercial leasing and commercial mortgage banking. Co.'s principal subsidiary is Metavante Corporation, a provider of integrated financial transaction processing, outsourcing services, software, and consulting services.

Pricing the Defeasance Option in Securitized Commercial Mortgages

To protect the interests of investors, commercial mortgage loans pooled for the issuance of commercial mortgage-backed securities (CMBS) have restrictive covenants that discourage the borrower from refinancing. Such restrictions limit the borrower's ability to access any accumulated equity. The predominant means of accessing this equity today is defeasance. By defeasing a loan, the borrower substitutes the commercial mortgage with U.S. Treasury or agency obligations whose payments match those of the defeased mortgage. Therefore, defeasance is an exchange option whereby the borrower gives up the portfolio of Treasury or agency securities and in return receives the market value of the commercial mortgage plus the liquidity benefits arising from accessing the accumulated equity in the underlying property. The value of the option to defease is shown to depend critically on the rate of return that can be earned on the released equity, prevailing interest rate conditions, as well as the option's contractual features.