Abstract
We study whether tax considerations are an important determinant of commercial mortgage default. We also study whether large lenders are better informed, or better at interpreting information for lending purposes, and hence have lower foreclosure rates; whether lenders have more information on larger borrowers than smaller borrowers, and hence have lower foreclosure rates on larger loans; and whether commercial mortgage defaults are related to debt service coverage and loan-to-values, both initial and contemporaneous. The paper’s main findings are fourfold. First, holding all else equal, there is evidence that tax considerations influence investors’ decisions about when to “put” assets to lenders. The results are consistent with the argument of Constantinides (J Financ Econ 13:65–89, 1984). Second, the evidence suggests that large lenders are especially knowledgeable about commercial mortgage borrowers and commercial property markets, in that they have lower foreclosure rates than smaller lenders. Third, on the question of whether lenders have more information on larger borrowers than smaller borrowers, we find that larger loans have, on average, lower default rates than smaller loans. Fourth, the findings suggest that lower default rates are associated with higher debt service coverage ratios, both initial and contemporaneous.
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Notes
In principle we could also study residential mortgage default to determine whether tax considerations influence the decision to default. However, as a part of the Mortgage Forgiveness Debt Relief Act of 2007, Congress enacted legislation that temporarily created a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. Hence, the residential mortgage default decision should be largely independent and unaffected by tax considerations.
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Cho, H., Ciochetti, B.A. & Shilling, J.D. Are Commercial Mortgage Defaults Affected by Tax Considerations?. J Real Estate Finan Econ 46, 1–23 (2013). https://doi.org/10.1007/s11146-011-9312-5
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DOI: https://doi.org/10.1007/s11146-011-9312-5