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Title:Defaults and losses on commercial real estate bonds PDF Logo
Authors:Wiggers, Tyler
Ashcraft, Adam B.
Issue Date:2012
Series/Report no.:Staff Report, Federal Reserve Bank of New York 544
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.
Subjects:Great Depression
CMBS market
default and loss study
commercial real estate
JEL:G10
N22
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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