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Three essays in commercial mortgages Holmes, Cynthia


This dissertation consists of three essays on the topic of commercial mortgages. The first paper contributes to the commercial mortgage literature and the multiple factor asset-pricing literature by creating a model for commercial mortgage returns. The result of an initial analysis using the five Fama and French (1993) factors is that the sensitivities of commercial mortgage returns and corporate bond returns to all factors are statistically indistinguishable. However, further analysis was performed using factors associated with real estate returns, and the result is that unlike corporate bonds, commercial mortgage returns are sensitive to the factor that measures growth in personal consumption. In the second paper, I investigate the two potential outcomes that can eventually arise when a commercial mortgage borrower fails to make a scheduled payment. Either the borrower reinstates the loan and resumes payment or the lender forecloses on the property. The following question arises: under which situation does each outcome occ.ur? I investigate this using a game-theoretic model and multinomial logit empirical tests on a disaggregate dataset. My key finding is that the outcome is based on the relative values of variables that include the borrower's equity in the secured property and the rate of property appreciation. Empirical tests confirm that the characteristics of real estate loans across delinquency outcomes are distinguishable. The third paper investigates the role of commercial mortgage guarantees in default. Childs, Ott and Riddiough (1996) use an options-based theoretical model to show that recourse should reduce the likelihood of default. This paper tests that prediction empirically using a database from a Canadian lender. The advantage of using a Canadian dataset is the prevalence of recourse lending not seen in the U.S. I find a negative relationship between default and the presence of a guarantee, supporting the Childs, Ott and Riddiough (1996) prediction.

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