Loan Modifications and the Commercial Real Estate Market

David Glancy, Robert Kurtzman and Lara Loewenstein

No 22-09, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Banks modify more CRE loans than CMBS, contributing to better loan performance when property incomes decline. However, banks have higher delinquency rates for less-stressed loans, consistent with modification policies encouraging strategic default. Motivated by these facts, we develop a tradeoff theory model in which lenders vary in their modification technologies. Modification frictions discourage strategic renegotiation, enabling CMBS to offer higher LTV loans and attract borrowers seeking higher leverage. The model produces cross-lender differences in LTVs and spreads consistent with the data. Reducing modification frictions at CMBS decreases welfare by restricting debt capacity for the borrowers that value it most.

Keywords: commercial real estate; modifications; LTV (search for similar items in EconPapers)
JEL-codes: G21 G22 G23 R33 (search for similar items in EconPapers)
Pages: 63
Date: 2022-04-12
New Economics Papers: this item is included in nep-ban and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Loan Modifications and the Commercial Real Estate Market (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:93947

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DOI: 10.26509/frbc-wp-202209

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