Working Paper
Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans
Abstract: We study the role that recourse plays in the commercial real estate loan contracts of the largest U.S. banks. We find that recourse is valued by lenders and is treated as a substitute for conventional equity. At origination, recourse loans have rate spreads that are at least 20 basis points lower and loan-to-value ratios that are around 3 percentage points higher than non-recourse loans. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Recourse loans were half as likely to receive accommodation during the COVID-19 pandemic, and the modifications that did occur entailed a relatively smaller reduction in payments.
Keywords: Commercial real estate; Recourse; LTV;
JEL Classification: G21; G22; G23; R33;
https://doi.org/10.17016/FEDS.2021.079
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File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2021079pap.pdf
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2021-12-17
Number: 2021-079