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.
File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2021079pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2021-12-17