LTV and DCR Are Not the Only Determining Factors for Defaults on Commercial Mortgages

For simplicity, some models used by CMBS investors assume that the non-recourse borrower will default immediately if the DCR falls below 1.0 or LTV goes above 100 (percent). This is sometimes referred to as “ruthless default” behavior. In reality, however, borrowers do not choose to default just because DCR is below 1.0 or LTV is higher than 100. 

This article examines some historical data and attempts to look at various factors that have an impact on the borrower’s decision to default, and presents historical default rates for each category. Read the report.

Note: This piece was featured in the CRE Finance World Winter 2014 edition.