Finance and Economics Discussion Series

Differences Across Originators in CMBS Loan Underwriting

Lamont K. Black, Chenghuan Sean Chu, Andrew Cohen, and Joseph B. Nichols
2011-05

Abstract: Differences in the organizational structure of CMBS loan originators may reflect differences in the incentives they face for underwriting risky loans. We treat an originator's type--that is, commercial bank, investment bank, insurance company, finance company, conduit lender, or foreign-owned entity--as a proxy for incentives related to warehousing risk, balance sheet lending, and regulatory constraints. After controlling for observable credit characteristics of over 30,000 loans securitized into CMBS after 1999, we find considerable differences in loan performance across originator types. The results suggest that moral hazard--captured by lack of warehousing risk-negatively affected the quality of loans underwritten by conduit lenders. On the other hand, despite opportunities for adverse selection, balance sheet lenders--commercial banks, insurance companies and finance companies--actually underwrote higher quality loans.

Keywords: CMBS, moral hazard, adverse selection, underwriting