Commercial Mortgage Terminations : Evidence from CMBS

Option theory predicts that mortgage default or prepayment will be exercised if the call or put option is quot;in the money.quot; We extend our analysis to commercial mortgages using data from commercial mortgage-backed securities. The paper presents a model of the competing risks of mortgage termination (default and prepayment) using data from commercial mortgage-backed securities (CMBS) deals.Our results show that the option model explains both default and prepayment for commercial mortgages. We find that loan specific variables (such as loan-to-value ratio, debt service coverage ratio, loan-rate spread and prepayment prevention) are important explanatory variables for both default and prepayment. We also find that default and prepayment vary rather dramatically across regions of the country; given that regional economies do not move in perfect lock-step, we would expect there to be cross-sectional variation in default rates. However, the degree of variation across regions in terms of prepayments is not as predictable