From Origination to Renegotiation: A Comparison of Portfolio and Securitized Commercial Real Estate Loans

Abstract

We use a unique loan-level dataset to compare portfolio and securitized commercial real estate loans. The paper documents how the types of loans banks choose to hold in their portfolios differ substantially from the types of loans the same banks securitize. Banks tend to hold loans that are “non-standard” in some observable dimension. These loans are riskier and more likely to become delinquent or distressed. Conditional on default, we find that banks are significantly more likely to extend portfolio loans than is the case for securitized loans. Our results suggest that banks have a comparative advantage in funding risky assets with contracts that may require flexibility in the event of distress.

Appendix Construction of Data Set for Estimation

We draw our loan sample from two distinct data bases, the Morningstar CMBS database and the FR Y-14 Q CRE schedule. This appendix provides some additional detail on the construction of the database, including some characteristics of the portions of both databases that were excluded from the analysis.

The CMBS data is drawn from the Morningstar database, which covers the CMBS market at the deal level. These deals include loans originated by banks, insurance companies, conduits and others. As of 2012:Q1, approximately 59 % of active CMBS loans were originated by banks. We limit our analysis to fixed rate loans originated by firms that are also in the FR Y-14 collection, which accounts for 84 % of CMBS bank originated loans. The FR Y-14 data collection included 19 firms in 2012:Q1.²¹ Within this sample we restrict our analysis to fixed rate loans originated and held by the 8 firms that are also active in the CMBS market. The decision to restrict the sample to both fixed rate loans and to the same group of firms active in both the markets was made to minimize concerns regarding the endogenity of the securitization decision. We limit our analysis to a group of loans that have similar loan structures and are all from firms that had the option to either securitize or hold loans on their portfolio.

Appendix Table 9 below compares the portfolio characteristics of our estimation sample with the portions of the CMBS and bank portfolio that we excluded from our analysis. The first two columns report the characteristics from banks in the CMBS sample that are not FR Y-14 reporters and from FR Y-14 reporters that are not active in the CMBS market. The third and fourth columns report the characteristics of the adjustable and mixed-rate loans from the sample of nine banks active in CMBS market that also were FR Y-14 reporters. This table reflects the active portfolios as of 2012:Q1.

The outlier in these six portfolios is clearly the adjustable rate CRE loans in CMBS portfolio that were originated by our sample of nine banks. As of 2012:Q1 there were very few of these adjustable rate CMBS loans still active. They were dominated by a small number of very larger hotel loans, many of which were in default. The negative spread to Treasuries reflects that many of these loans may have been indexed to baseline rates other than Treasuries at origination.

Restricting ourselves to the other portfolios, the patterns we observe in our sample repeat. CMBS loans are larger with higher LTVs ratios and occupancy rates in each set of samples. Bank loans have higher debt yields and spreads to Treasuries than CMBS loans. Finally, as of 2012:Q1 more CMBS loans were in default than the bank loan portfolios.

Table 9 Characteristics of excluded and included loans

Appendix Fig. 7 below provides additional evidence that the adjustable rate portfolios for the CMBS portfolios are fundamentally different. CMBS adjustable rate loans from our sample of nine banks have some of the shortest portfolio distributions in our sample while bank adjustable rate loans have some of the longest. The differences in the distribution of the original term between bank and CMBS loans between the fixed rate loans in our sample and the total portfolio from originators outside our sample are however quite similar.

Fig. 7

Distribution of bank and CMBS portfolios by original term

Appendix Fig. 8 below shows the distribution across our six portfolios by property type. Again the adjustable rate CMBS loans from our sample of nine banks represents a strong outlier, being dominated by hotel loans while adjustable rate loans in bank portfolios are dominated by multifamily loans. The property distribution for CMBS and bank loans from our sample of nine banks is similar to the distribution we observe from the originators we exclude from our sample. These figures support our contention that our sample does provide a representative sample to examine CMBS vs. bank portfolios, and supports our decision to exclude the adjustable rate mortgages.

The larger size for CMBS loans may reflect differences in tenant quality, and therefore credit risk, between CMBS and bank loans. In the retail space the larger properties, such are often “anchored” by high quality tenants than those served by smaller “strip” centers. Unfortunately we lack the detailed information on tenant quality in both databases. The size of the property, and the related loan balance, may be used to proxy for the presence of such “anchored” retail properties, and similar properties with high quality tenants in other property types. Appendix Table 10 below reports the differences in the average balance at origination between CMBS and banks by property type. We see here that CMBS loans consistently have larger balances at origination than bank loans across all property types.

Fig. 8

Distribution of bank and CMBS portfolios by property type

Insert text on how ARM portfolios are different, in particular in CMBS, but out of sample portfolios are similar.

Table 10 Balance at origination by property type ($ millions)