Trustee Affiliation and Servicer Oversight : Evidence from CMBS Markets

We study the effect of a change in trustees' incentives to monitor servicers in CMBS markets. Our identification strategy rests on variation in servicer-trustee affiliation that arises from mergers. We present evidence that affiliation is associated with excessive principal and interest advances on delinquent loans that are not in the interest of bondholders. We observe that a servicer-trustee affiliation affects the waterfall cash flows of senior, mezzanine, and junior bond-tranches. Additionally, we find that affiliation increases the loss rate by $0.05 or $0.07 per dollar of outstanding debt and estimate an economic impact of $5.5 billion in market-wide liquidation losses