Default Risk of CMBS Loans: What Explains the Regional Variations?

We find substantial regional variations in CMBS loan default rates based on a 10-year history of nearly 38,000 CMBS loans. We seek to explain those variations with well documented risk factors such as negative equity, insolvency, property type, originator and state foreclosure law, as well as some newly introduced factors such as local unemployment rate, loan covenant (lock out) and natural disaster (Katrina). Many of the aforementioned factors are significant for CMBS loan default risk and they help explain part of the regional variations in CMBS loan default rate. We also find a significant negative relationship between local residential real estate appreciation and CMBS loan default – those regions with higher house price appreciation rates have lower default risk in CMBS loans. Moreover, differences in MSA-level residential real estate appreciation rate add explanatory power of the regional variations in CMBS loan risk, even though they do not fully explain the regional risk. Our findings have important implications for the CMBS investment community.