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Strategic Default, Workout, and Commercial Mortgage Valuation

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  • Riddiough, Timothy J
  • Wyatt, Steve B

Abstract

This paper extends existing equilibrium commercial mortgage pricing models by endogenizing negotiated workout into the usual noncooperative lending game. Workout is a feasible subgame strategy for the lender to play whenever foreclosure transaction costs exist for either party to a loan transaction. In particular, negotiated workout solutions Pareto dominate the foreclosure alternative when default occurs. To obtain our results, we embed a cooperative bargaining game within a noncooperative mortgage loan/default game. We also address the valuation "wedge" problem that occurs when foreclosure transaction costs are introduced. Through the notion of replacement game equilibrium, we find symmetric mortgage pricing solutions that eliminate the valuation wedge and thus suggest that lending will occur in commercial real estate mortgage markets even when foreclosure transaction costs exist. Copyright 1994 by Kluwer Academic Publishers

Suggested Citation

  • Riddiough, Timothy J & Wyatt, Steve B, 1994. "Strategic Default, Workout, and Commercial Mortgage Valuation," The Journal of Real Estate Finance and Economics, Springer, vol. 9(1), pages 5-22, July.
    • Handle: RePEc:kap:jrefec:v:9:y:1994:i:1:p:5-22
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    Cited by:

    1. David Downs & Pisun (Tracy) Xu, 2015. "Commercial Real Estate, Distress and Financial Resolution: Portfolio Lending Versus Securitization," The Journal of Real Estate Finance and Economics, Springer, vol. 51(2), pages 254-287, August.
    2. Jun Chen & Yongheng Deng, 2013. "Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans," The Journal of Real Estate Finance and Economics, Springer, vol. 46(4), pages 609-632, May.
    3. Tracey Seslen & William C. Wheaton, 2010. "Contemporaneous Loan Stress and Termination Risk in the CMBS Pool: How “Ruthless” is Default?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(2), pages 225-255, June.
    4. Michael G. Bradley & Amy Crews Cutts & Wei Liu, 2015. "Strategic Mortgage Default: The Effect of Neighborhood Factors," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 271-299, June.
    5. Adelino, Manuel & Gerardi, Kristopher & Willen, Paul S., 2013. "Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 835-853.
    6. Tracey Seslen & William C. Wheaton, 2005. "Contemporaneous Loan Stress and Termination Risk in the CMBS pool: how "Ruthless" is default?," Working Paper 8582, USC Lusk Center for Real Estate.
    7. Been, Vicki & Weselcouch, Mary & Voicu, Ioan & Murff, Scott, 2013. "Determinants of the incidence of U.S. Mortgage Loan Modifications," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3951-3973.
    8. Hoon Cho & Brian Ciochetti & James Shilling, 2013. "Are Commercial Mortgage Defaults Affected by Tax Considerations?," The Journal of Real Estate Finance and Economics, Springer, vol. 46(1), pages 1-23, January.
    9. Shu Ling Chiang & Ming Shann Tsai & Shan Jiang, 2021. "The Influences of Foreclosure Factors on the Value, Yield, Duration and Convexity of a Mortgage," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 361-394, September.
    10. Stephen L. Buschbom & James B. Kau & Donald C. Keenan & Constantine Lyubimov, 2021. "Delinquencies, Default and Borrowers' Strategic Behavior toward the Modification of Commercial Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(3), pages 936-967, September.
    11. Seow Ong & Poh Neo & Yong Tu, 2008. "Foreclosure Sales: The Effects of Price Expectations, Volatility and Equity Losses," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 265-287, April.

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