DETERMINANTS OF MULTIFAMILY
MORTGAGE DEFAULT
By
Wayne R. Archer
Peter J. Elmer
David M. Harrison
and
David C. Ling
June, 1999
Working Paper 99-2
(Electronic copies of FDIC Working Papers are available at www.fdic.gov)
Federal Deposit Insurance Corporation
MORTGAGE DEFAULT
By
Wayne R. Archer
Peter J. Elmer
David M. Harrison
and
David C. Ling
June, 1999
Working Paper 99-2
(Electronic copies of FDIC Working Papers are available at www.fdic.gov)
Federal Deposit Insurance Corporation
DETERMINANTS OF MULTIFAMILY MORTGAGE DEFAULT
Wayne R. Archer
Center for Real Estate Studies
Department of Finance, Insurance & Real Estate
University of Florida
Peter J. Elmer
Division of Research and Statistics
Federal Deposit Insurance Corporation
David M. Harrison
School of Business Administration
University of Vermont
David C. Ling*
Center for Real Estate Studies
Department of Finance, Insurance & Real Estate
University of Florida
Abstract
Option-based models of mortgage default posit that the central measure of default risk is the loan-
to-value (LTV) ratio. We argue, however, that an unrecognized problem with extending the basic
option model to existing multifamily and commercial mortgages is that key variables in the option
model are endogenous to the loan origination and property sale process. This endogeneity implies,
among other things, that no empirical relation may be observed between default and LTV. This
is because lenders may require lower LTVs in order to mitigate risk, so mortgages with low and
moderate LTVs may be as likely to default as those with high LTVs. Mindful of this risk
endogeneity and its empirical implications, we examine the default experience of 9,639
multifamily mortgage loans securitized by the Resolution Trust Corporation (RTC) and the
Federal Deposit Insurance Corporation (FDIC) during the period 1991!1996. The extensive
nature of the data supports multivariate analysis of default incidence in a number of respects not
possible in previous studies.
* The views expressed in this paper are those of the authors and not necessarily those of the
Federal Deposit Insurance Corporation. Correspondence may be directed either to Center for
Real Estate Studies, Department of Finance, Insurance & Real Estate, University of Florida,
Gainesville, FL 32611-7168. Phone: (352) 392-9307, Fax: (352) 392-0301, E-mail:
ling@dale.cba.ufl.edu or to Peter Elmer, FDIC Division of Research and Statistics, 550 17th St.
N.W., Washington, D.C. 20429. Phone: (202) 898-7366, Fax: (202) 898-7189, E-mail:
pelmer@fdic.gov.
Wayne R. Archer
Center for Real Estate Studies
Department of Finance, Insurance & Real Estate
University of Florida
Peter J. Elmer
Division of Research and Statistics
Federal Deposit Insurance Corporation
David M. Harrison
School of Business Administration
University of Vermont
David C. Ling*
Center for Real Estate Studies
Department of Finance, Insurance & Real Estate
University of Florida
Abstract
Option-based models of mortgage default posit that the central measure of default risk is the loan-
to-value (LTV) ratio. We argue, however, that an unrecognized problem with extending the basic
option model to existing multifamily and commercial mortgages is that key variables in the option
model are endogenous to the loan origination and property sale process. This endogeneity implies,
among other things, that no empirical relation may be observed between default and LTV. This
is because lenders may require lower LTVs in order to mitigate risk, so mortgages with low and
moderate LTVs may be as likely to default as those with high LTVs. Mindful of this risk
endogeneity and its empirical implications, we examine the default experience of 9,639
multifamily mortgage loans securitized by the Resolution Trust Corporation (RTC) and the
Federal Deposit Insurance Corporation (FDIC) during the period 1991!1996. The extensive
nature of the data supports multivariate analysis of default incidence in a number of respects not
possible in previous studies.
* The views expressed in this paper are those of the authors and not necessarily those of the
Federal Deposit Insurance Corporation. Correspondence may be directed either to Center for
Real Estate Studies, Department of Finance, Insurance & Real Estate, University of Florida,
Gainesville, FL 32611-7168. Phone: (352) 392-9307, Fax: (352) 392-0301, E-mail:
ling@dale.cba.ufl.edu or to Peter Elmer, FDIC Division of Research and Statistics, 550 17th St.
N.W., Washington, D.C. 20429. Phone: (202) 898-7366, Fax: (202) 898-7189, E-mail:
pelmer@fdic.gov.