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Determinants of Multifamily Mortgage Default
Author(s) -
Archer Wayne R.,
Elmer Peter J.,
Harrison David M.,
Ling David C.
Publication year - 2002
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1080-8620.t01-1-00012
Subject(s) - endogeneity , loan to value ratio , economics , default , real estate , actuarial science , debt , cash flow , collateral , securitization , default risk , loan , financial economics , econometrics , mortgage insurance , monetary economics , business , credit risk , financial system , finance , insurance policy , casualty insurance
Option–based models of mortgage default posit that the central measure of default risk is the loan–to–value (LTV) ratio. We argue, however, that an unrecognized problem with extending the basic option model to existing multifamily and commercial mortgages is that key variables in the option model are endogenous to the loan origination and property sale process. This endogeneity implies, among other things, that no empirical relationship may be observed between default and LTV. Since lenders may require lower LTVs in order to mitigate risk, mortgages with low and moderate LTVs may be as likely to default as those with high LTVs. Mindful of this risk endogeneity and its empirical implications, we examine the default experience of 495 fixed–rate multifamily mortgage loans securitized by the Resolution Trust Corporation (RTC) and the Federal Deposit Insurance Corporation (FDIC) during the period 1991–1996. The extensive nature of the data supports multivariate analysis of default incidence in a number of respects not possible in previous studies. Consistent with our expectations, we find that LTV evidences no relationship to default incidence, while the strongest predictors of default are property characteristics, including three–digit ZIP code location and initial cash flow as reflected in the debt coverage ratio. The latter results are particularly interesting in that they dominated the influence of postorigination changes in the local economy.