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Defaults and losses on commercial real estate bonds during the Great Depression era

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  • Adam B. Ashcraft
  • Tyler Wiggers

Abstract

We employ a unique data set of public commercial real estate (CRE) bonds issued during the Great Depression era (1920-32) to determine their frequency of default and total loss given default. Default rates on these bonds far exceeded those originated in subsequent periods, driven in part by the greater economic stress of the Depression as well as the lower level of financial sophistication of investors and structures that prevailed in 1920-32. Our results confirm that making loans with higher loan-to-value ratios results in higher rates of default and loss. They also support the business cycle?s significance to the performance of CRE assets. Despite the large number of defaults in the early 1930s, the losses, which typically occurred after 1940, are comparable to those for contemporary loans, largely due to the rapid recovery of the economy from the Depression. This finding has relevance today, as numerous entities have a large amount of sub-performing CRE assets to work out. While the data point to better loss performance the quicker a problem loan is worked out, this may not hold true when there is a rapid recovery around the corner.

Suggested Citation

  • Adam B. Ashcraft & Tyler Wiggers, 2012. "Defaults and losses on commercial real estate bonds during the Great Depression era," Staff Reports 544, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:544
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    References listed on IDEAS

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    1. Eugene N. White, 2014. "Lessons from the Great American Real Estate Boom and Bust of the 1920s," NBER Chapters, in: Housing and Mortgage Markets in Historical Perspective, pages 115-158, National Bureau of Economic Research, Inc.
    2. Field, Alexander James, 1992. "Uncontrolled Land Development and the Duration of the Depression in the United States," The Journal of Economic History, Cambridge University Press, vol. 52(4), pages 785-805, December.
    3. William N. Goetzmann & Frank Newman, 2010. "Securitization in the 1920's," NBER Working Papers 15650, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Tobias Adrian & Adam B. Ashcraft, 2012. "shadow banking: a review of the literature," The New Palgrave Dictionary of Economics,, Palgrave Macmillan.
    2. Eugene N. White, 2014. "Lessons from the Great American Real Estate Boom and Bust of the 1920s," NBER Chapters, in: Housing and Mortgage Markets in Historical Perspective, pages 115-158, National Bureau of Economic Research, Inc.
    3. Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.
    4. Tobias Adrian, 2014. "Financial stability policies for shadow banking," Staff Reports 664, Federal Reserve Bank of New York.
    5. Richard Stanton & Nancy Wallace, 2018. "CMBS Subordination, Ratings Inflation, and Regulatory†Capital Arbitrage," Financial Management, Financial Management Association International, vol. 47(1), pages 175-201, March.

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    Keywords

    Default (Finance); real estate investments; Bonds; Depressions;
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