Working Papers

2017-19 | September 2017

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Safe Collateral, Arm’s-Length Credit: Evidence from the Commercial Real Estate Market

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There are two main creditors in commercial real estate: arm’s-length investors and banks. We model commercial mortgage-backed securities (CMBS) as the less informed source of credit. In equilibrium, these investors fund properties with a low probability of distress and banks fund properties that may require renegotiation. We test the model using the 2007-2009 collapse of the CMBS market as a natural experiment, when banks funded both collateral types. Our results show that properties likely to have been securitized were less likely to default or be renegotiated, consistent with the model. This suggests that securitization in this market funds safe collateral.

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Article Citation

Black, Lamont, John Krainer, and Joseph Nichols. 2017. "Safe Collateral, Arm’s-Length Credit: Evidence from the Commercial Real Estate Market," Federal Reserve Bank of San Francisco Working Paper 2017-19. Available at https://doi.org/10.24148/wp2017-19