8I: Commercial mortgages

[Viking]

I know it is probably just a detail, but it still bugs me. Has anyone noticed that in the Atkinson/Dallas textbook when they list different invetsments, in the commercial mortgage section they say that there is a small pre-payment penalty, but in another study note it is said that pre-payment penalty are huge so there is no chance of pre-payment.

Any specialist in commercial mortgages?

[mayreeh]

I'm not a specialist, but back when I did cashflow testing, we assumed no prepayments on our commercial mortgages. Almost all were 5 year mortgages with huge balloon payments.

When I read A&D on that one, I thought that they were wrong.

[Datatarium]

In my notes, I wrote default is highly correlated with geographic regions. And default charge reduces expected earnings.

I guess one author was writing about a good geographic area for not defaulting and didn't need the significant pp charge b/c default didn't erode away their profits. Whereas the other author need pp protection b/c of where he issues business b/c his defaults charges are eroding their profits and there's no room to get selected against.

[Jack]

Commercial mortgage defaults are definately geographically clustered. After the oil bust in the early 90's we had a boat load of defaults in Texas. We subsequently owned a boat load of comercial RE in TX.

[Jack]

It's been a while since I've modeled comm morts but I seem to remember quite a few of them having make-whole provisions.