The value of renegotiation frictions: Evidence from commercial real estate

David Glancy, Robert Kurtzman and Lara Loewenstein

Journal of Financial Intermediation, 2025, vol. 62, issue C

Abstract: Loan modifications can ease borrowers’ financial burdens and mitigate loan losses. However, the threat of future strategic renegotiation may cause lenders to tighten ex-ante credit provision. We evaluate this trade-off in a dynamic model of loan underwriting with frictional renegotiation and calibrate it using loan-level CRE data from banks and CMBS. We find that modification frictions can rationalize a number of empirical facts regarding how CRE loan underwriting and performance differ across lenders. Key to this result, high frictions to modifying CMBS loans reduce renegotiation, increase debt capacity, and cause high-leverage-demand borrowers to select into the CMBS market. Consequently, easing CMBS modification frictions reduces welfare by restricting the menu of LTVs available in the market.

Keywords: Commercial real estate; Modifications; LTV (search for similar items in EconPapers)
JEL-codes: G21 G22 G23 R33 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:62:y:2025:i:c:s1042957325000129

DOI: 10.1016/j.jfi.2025.101144

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