IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2022-50.html
   My bibliography  Save this paper

Loan Modifications and the Commercial Real Estate Market

Author

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.

Suggested Citation

  • David P. Glancy & Robert J. Kurtzman & Lara Loewenstein, 2022. "Loan Modifications and the Commercial Real Estate Market," Finance and Economics Discussion Series 2022-050, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2022-50
    DOI: 10.17016/FEDS.2022.050
    as

    Download full text from publisher

    File URL: https://www.federalreserve.gov/econres/feds/files/2022050pap.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.17016/FEDS.2022.050?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    2. Dirk Hackbarth & Christopher A. Hennessy & Hayne E. Leland, 2007. "Can the Trade-off Theory Explain Debt Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1389-1428, 2007 04.
    3. Andra Ghent & Rossen Valkanov, 2016. "Comparing Securitized and Balance Sheet Loans: Size Matters," Management Science, INFORMS, vol. 62(10), pages 2784-2803, October.
    4. Lamont Black & John Krainer & Joseph Nichols, 2017. "From Origination to Renegotiation: A Comparison of Portfolio and Securitized Commercial Real Estate Loans," The Journal of Real Estate Finance and Economics, Springer, vol. 55(1), pages 1-31, July.
    5. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Feng Dong & Yang Jiao & Haoning Sun, 2024. "Bubbly Booms and Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 53, pages 71-122, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David Glancy & John R. Krainer & Robert J. Kurtzman & Joseph B. Nichols, 2022. "Intermediary Segmentation in the Commercial Real Estate Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(7), pages 2029-2080, October.
    2. Lamont K Black & John R Krainer & Joseph B Nichols & Stijn Van Nieuwerburgh, 2020. "Safe Collateral, Arm’s-Length Credit: Evidence from the Commercial Real Estate Market," The Review of Financial Studies, Society for Financial Studies, vol. 33(11), pages 5173-5211.
    3. Annabi, Amira & Breton, Michèle & François, Pascal, 2012. "Resolution of financial distress under Chapter 11," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1867-1887.
    4. Erwan Morellec & Philip Valta & Alexei Zhdanov, 2015. "Financing Investment: The Choice Between Bonds and Bank Loans," Management Science, INFORMS, vol. 61(11), pages 2580-2602, November.
    5. Shibata, Takashi & Nishihara, Michi, 2018. "Investment timing, reversibility, and financing constraints," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 771-796.
    6. Ulrich Hege & Pierre Mella-Barral, 2019. "Bond Exchange Offers or Collective Action Clauses?," Finance, Presses universitaires de Grenoble, vol. 40(3), pages 77-119.
    7. Hui Chen & Jianjun Miao & Neng Wang, 2010. "Entrepreneurial Finance and Nondiversifiable Risk," The Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4348-4388, December.
    8. Bourgeon, Jean-Marc & Dionne, Georges, 2013. "On debt service and renegotiation when debt-holders are more strategic," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 353-372.
    9. Annabi, Amira & Breton, Michèle & François, Pascal, 2012. "Game theoretic analysis of negotiations under bankruptcy," European Journal of Operational Research, Elsevier, vol. 221(3), pages 603-613.
    10. Pawlina, Grzegorz, 2010. "Underinvestment, capital structure and strategic debt restructuring," Journal of Corporate Finance, Elsevier, vol. 16(5), pages 679-702, December.
    11. Gryglewicz, Sebastian, 2011. "A theory of corporate financial decisions with liquidity and solvency concerns," Journal of Financial Economics, Elsevier, vol. 99(2), pages 365-384, February.
    12. Moraux, Franck & Silaghi, Florina, 2014. "Inside debt renegotiation: Optimal debt reduction, timing, and the number of rounds," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 269-295.
    13. Adriana Breccia & William Perraudin, 2010. "Debt Valuation and Chapter 22," Birkbeck Working Papers in Economics and Finance 1015, Birkbeck, Department of Economics, Mathematics & Statistics.
    14. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    15. Alexander Kurshev & Ilya A. Strebulaev, 2015. "Firm Size and Capital Structure," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 1-46, September.
    16. Christensen, Peter Ove & Flor, Christian Riis & Lando, David & Miltersen, Kristian R., 2014. "Dynamic capital structure with callable debt and debt renegotiations," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 644-661.
    17. Koziol, Christian & Lawrenz, Jochen, 2010. "Optimal design of rating-trigger step-up bonds: Agency conflicts versus asymmetric information," Journal of Corporate Finance, Elsevier, vol. 16(2), pages 182-204, April.
    18. Howard Qi & Sheen Liu & Chunchi Wu, 2009. "On the calibration of structural credit spread models," Annals of Finance, Springer, vol. 5(2), pages 189-208, March.
    19. Xu, Ruxing & Li, Shenghong, 2010. "Belief updating, debt pricing and financial decisions under asymmetric information," Research in International Business and Finance, Elsevier, vol. 24(2), pages 123-137, June.
    20. Rainer Baule, 2019. "The cost of debt capital revisited," Business Research, Springer;German Academic Association for Business Research, vol. 12(2), pages 721-753, December.

    More about this item

    Keywords

    Commercial real estate; Modifications; LTV;
    All these keywords.

    JEL classification:

    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2022-50. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.