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Working Paper
Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans
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, ...
Working Paper
Competition and Bank Fragility
Working Paper
Safe Collateral, Arm's-Length Credit : Evidence from the Commercial Real Estate Mortgage Market
When collateral is safe, there are less opportunities for things to go wrong. We examine matching between collateral and creditors in the commercial real estate mortgage market by comparing loans in commercial mortgage backed securities (CMBS) conduits and bank portfolios. We model CMBS financing as lower cost but less informed, such that only safe collateral is funded by CMBS. This prediction is tested using the 2007-2009 shutdown of the CMBS market as a natural experiment. The loans funded by banks that would have been securitized are less likely to default or be renegotiated, indicating ...
Working Paper
Land Price Dynamics and Macroeconomic Fluctuations with Imperfect Substitution in Real Estate Markets
The collateral channel, whereby an increase in residential house prices leads to an increase in commercial property prices, loosening firm borrowing constraints and leading to higher firm investment, is weaker when residential and commercial real estate are imperfect substitutes. We first show in a reduced form regression with firm level data that the strength of local zoning regulations has a negative effect on the estimated increase in firm investment following an increase in local residential real estate prices. We then modify the DSGE model of the collateral channel in Liu, Wang, and Zha ...
Working Paper
Intermediary Segmentation in the Commercial Real Estate Market
Banks, life insurers, and commercial mortgage-backed securities (CMBS) lenders originate the vast majority of U.S. commercial real estate (CRE) loans. While these lenders compete in the same market, they differ in how they are funded and regulated, and therefore specialize in loans with different characteristics. We harmonize loan-level data across the lenders and review how their CRE portfolios differ. We then exploit cross-sectional differences in loan portfolios to estimate a simple model of frictional substitution across lender types. The substitution patterns in the model match well the ...
Working Paper
Imperfect Substitutability in Real Estate Markets and the Effect of Housing Demand on the Macroeconomy
Changes in housing demand can have a macroeconomic effect through the collateral channel, where the change in residential real estate prices is associated with a change in commercial real estate prices, affecting firm collateral and thus firm investment. We argue that this channel is weaker when residential and commercial real estate are poor substitutes. Using cross-state heterogeneity in the strength of zoning regulations as a proxy for heterogeneity in the substitutability of residential and commercial real estate, we first show with firm level data that the strength of local zoning ...
Working Paper
Determinants of Recent CRE Distress: Implications for the Banking Sector
Rising interest rates and structural shifts in the demand for space have strained CRE markets and prompted concern about contagion to the largest CRE debt holder: banks. We use confidential loan-level data on bank CRE portfolios to examine banks' exposure to at-risk CRE loans. We investigate (1) what loan characteristics are associated with delinquency and (2) to what extent the portfolio composition of major CRE lenders determines their exposure to losses. Higher LTVs, larger property sizes, and greater local remote work tendencies are all associated with increased delinquency risk, ...