Default of Commercial Mortgage Loans during the Financial Crisis

We document the default rates of CMBS loans during the recent financial crisis. The 30 , 60 , and 90 day delinquency rates of conduit CMBS loans have risen sharply since late 2008 and have reached levels that are about 7 times of the 10-year average. Comparing to the previous crisis in the early 1990s, default rates of CMBS loans at the start of the recent crisis were low but they have accelerated more rapidly. Conduit CMBS loans perform similarly to commercial mortgages held by banks & thrifts, but have been worse than those held by life insurance companies in the past 10 years. Comparing to loans in the residential market, conduit CMBS loans have comparable default rate with prime conventional FRMs but remarkably lower default rate than those of subprime FRMs and subprime ARMs. We find limited evidence that substantial deterioration in CMBS loan underwriting occurred prior to the crisis. Instead, we discover that property value change has a significant impact on CMBS loan default with a 4 quarter lag, and that NOI growth affects default with a 1-quarter lag. Finally, we find a structural break in the relation between property value change and CMBS loan default starting from 2007Q4 but the relation between CMBS loan default and NOI growth remains stable over the entire 2000-2010 period.