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Determinants of Credit Spreads in Commercial Mortgages
Author(s) -
Titman Sheridan,
Tompaidis Stathis,
Tsyplakov Sergey
Publication year - 2005
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/j.1540-6229.2005.00136.x
Subject(s) - economics , real estate , endogeneity , loan to value ratio , monetary economics , commercial mortgage backed security , loan , econometrics , financial economics , mortgage insurance , real estate investment trust , actuarial science , capitalization rate , finance , casualty insurance , insurance policy
This article examines the cross‐sectional and time‐series determinants of commercial mortgage credit spreads as well as the terms of the mortgages. Consistent with theory, our empirical evidence indicates that mortgages on property types that tend to be riskier and have greater investment flexibility exhibit higher spreads. The relationship between the loan‐to‐value (LTV) ratio and spreads is relatively weak, which is probably due to the endogeneity of the LTV choice. However, the average LTV ratio per lender has a strong positive relation with credit spreads, which is consistent with the idea that lenders specialize in mortgages with either high or low levels of risk, and that high LTV mortgages require substantially higher spreads. Finally, we observe that spreads widen and mortgage terms become stricter after periods of poor performance of the real estate markets and after periods of greater default rates of outstanding real estate loans.