Commercial Mortgage Delinquency, Foreclosure and Reinstatement

Commercial mortgage default is modeled in two stages. First, a mortgage becomes delinquent, when the borrower stops making payments. Second, the delinquency is either reinstated (payments are resumed) or the lender forecloses. The results of the empirical estimations have implications for lenders’ monitoring functions. Lenders should use the critical variables of loan-to-value ratio, debt coverage ratio and guarantee to identify expected delinquent loans. Within this pool of delinquent loans, these same characteristics can be used to predict the outcome, which could be reinstatement or foreclosure. An important contribution of this paper is to demonstrate that the loan-to-value ratio, debt coverage ratio and guarantee differ in a statistically significant way across these outcomes. Thank you to my doctoral committee members Tsur Somerville, Adlai Fisher and Stan Hamilton. Enormous thanks are also due to the anonymous lender who provided the database. Generous funding from the Real Estate Research Institute is gratefully acknowledged. Any errors are mine.