Likely and Unlikely Reasons for Selection into Securitization: Evidence from Commercial Mortgages

We investigate differences in the characteristics and performance of securitized loans versus loans held on lenders’ balance sheets using a unique data set of commercial mort­ gages. The main findings are as follows. First, consistent with risk-sharing being a likely reason for securitization, loan size strongly predicts the likelihood of securiti­ zation. The largest 10% of loans have a 44% chance of being securitized while the smallest 10% of loans have a less than 1% chance of securitization. Second, commer­ cial loan performance (i.e., default) is not predictable by securitization, suggesting that CMBS loans are, ex post, not riskier. Third, we provide a stylized model that links the selection into securitization of a loan with its performance. Using this model, we find no evidence of adverse selection in the commercial mortgages market. JEL classification: G21, G23, G20