Essays on commercial mortgage-backed securities

Date of Completion

January 2003

Keywords

Business Administration, Management|Economics, General|Economics, Finance

Degree

Ph.D.

Abstract

This dissertation consists of two essays on commercial mortgage-backed securities (CMBS). The first essay examines the initial pricing of CMBS using a current and comprehensive database of modern CMBS issues. This paper extends the previous empirical valuation models of CMBS by employing instrumental variables regression to estimate a two-equation system: subordination and spread equations. The results are consistent with theory. In general, variables describing quality of loans and pool diversification are significant in the pricing of new CMBS. Furthermore, variables describing cash flow timing risk such as prepayment penalties and restrictions are statistically significant in the spread model for AAA tranches. The BBB tranche price is influenced by the quality of the loans and pool diversification. We find that AA and A tranches are shielded from both default and prepayment risks and therefore variables describing the quality of the loans and prepayment restrictions do not have explanatory power in the spread models for these tranches. ^ My second essay studies the default and prepayment of individual loans underlying CMBS within a competing risk framework. A data set of 18,154 securitized loans originated during 1996–2000 is employed in this study. This paper is the first to examine the terminations by property type and to compare the results with the overall model comprising all types of property. We find that the effects of some variables influencing default and prepayment decisions vary significantly across property types and are different than in the overall model. For instance, the effect of economic conditions varies significantly by property type. The change in market conditions has a larger impact on default risk than on prepayment risk. Furthermore, we observe a consistent result across property type and in the overall model that the likelihood of prepayment significantly lower when a loan is currently subject to lockout/defeasance provision. ^ Finally, we find evidence supporting the literature on endogeneity in the loan origination process. There is evidence indicates that lenders simultaneously determine LTV, DSCR and coupon rate in order to compensate for risk. The effects of this endogeneity are varied significantly by property type and are different than the overall model. ^

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