Foreclosure of Securitized Commercial Mortgages - A Model of the Special Servicer

26 Pages Posted: 15 Aug 2011 Last revised: 15 Nov 2011

See all articles by Peng Liu

Peng Liu

Cornell University - S.C. Johnson College of Business - School of Hotel Administration

Daniel C. Quan

Cornell University - School of Hotel Administration

Multiple version iconThere are 2 versions of this paper

Date Written: April 23, 2011

Abstract

The decision to foreclose on a CMBS mortgage is made by the special servicer. A mortgage loan is in special servicing when it is either delinquent or in a state of imminent default. A special servicer should represent the interests of the underlying CMBS bondholders by returning the highest possible value to the investors. In this paper, we show that a special servicer's compensation structure results in an incentive for her to extend a loan beyond the time desired by its bondholders. We develop a model and demonstrate how compensation incentives interact and influence a special servicer's foreclosure decisions. Our model takes into consideration the dynamic nature of such a decision by viewing is as a dynamic programming problem whereby foreclosure represents a discrete terminal state of an optimal stopping problem. This model thus captures the trade-off between continuation of a loan and termination and we use this model to determine how the stopping rule changes under various compensation structures.

Keywords: CMBS, Special Servicer, Foreclosure, Optimal Contract Design, First-loss Bond

Suggested Citation

Liu, Peng and Quan, Daniel C., Foreclosure of Securitized Commercial Mortgages - A Model of the Special Servicer (April 23, 2011). Journal of Real Estate Finance and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1908977 or http://dx.doi.org/10.2139/ssrn.1908977

Peng Liu (Contact Author)

Cornell University - S.C. Johnson College of Business - School of Hotel Administration ( email )

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Ithaca, NY 14853
United States
6072542960 (Phone)

Daniel C. Quan

Cornell University - School of Hotel Administration ( email )

436 Statler Hall
Cornell University
Ithaca, NY 14853-6902
United States
607-255-6404 (Phone)
607-255-1277 (Fax)

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