Working Paper
Loan Modifications and the Commercial Real Estate Market
Abstract: Banks modify more CRE loans than CMBS, contributing to better loan performance when property incomes decline. However, banks have higher delinquency rates for less-stressed loans, consistent with modification policies encouraging strategic default. Motivated by these facts, we develop a tradeoff theory model in which lenders vary in their modification technologies. Modification frictions discourage strategic renegotiation, enabling CMBS to offer higher LTV loans and attract borrowers seeking higher leverage. The model produces cross-lender differences in LTVs and spreads consistent with the data. Reducing modification frictions at CMBS decreases welfare by restricting debt capacity for the borrowers that value it most.
Keywords: Commercial real estate; Modifications; LTV;
JEL Classification: R33; G21; G22; G23;
https://doi.org/10.17016/FEDS.2022.050
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File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2022050pap.pdf
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2022-08-08
Number: 2022-050