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

Foreclosure of Securitized Commercial Mortgages—A Model of the Special Servicer 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. The Journal of Real Estate Finance and Economics Springer Journals

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

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Springer US
Copyright © 2011 by Springer Science+Business Media, LLC
Economics / Management Science; Regional/Spatial Science; Finance/Investment/Banking
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