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Working Paper
Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans
We study the role that recourse plays in the commercial real estate loan contracts of the largest U.S. banks. We find that recourse is valued by lenders and is treated as a substitute for conventional equity. At origination, recourse loans have rate spreads that are at least 20 basis points lower and loan-to-value ratios that are around 3 percentage points higher than non-recourse loans. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Recourse loans were half as likely to receive accommodation during the COVID-19 pandemic, ...
Working Paper
Intermediary Segmentation in the Commercial Real Estate Market
Banks, life insurers, and commercial mortgage-backed securities (CMBS) lenders originate the vast majority of U.S. commercial real estate (CRE) loans. While these lenders compete in the same market, they differ in how they are funded and regulated, and therefore specialize in loans with different characteristics. We harmonize loan-level data across the lenders and review how their CRE portfolios differ. We then exploit cross-sectional differences in loan portfolios to estimate a simple model of frictional substitution across lender types. The substitution patterns in the model match well the ...
Working Paper
Did QE Lead Banks to Relax Their Lending Standards? Evidence from the Federal Reserve's LSAPs
Using confidential loan officer survey data on lending standards and internal risk ratings on loans, we document an effect of large-scale asset purchase programs (LSAPs) on lending standards and risk-taking. We exploit cross-sectional variation in banks? holdings of mortgage-backed securities to show that the first and third round of quantitative easing (QE1 and QE3) significantly lowered lending standards and increased loan risk characteristics. The magnitude of the effects is about the same in QE1 and QE3, and is comparable to the effect of a one percentage point decrease in the Fed funds ...
Working Paper
Determinants of Recent CRE Distress: Implications for the Banking Sector
Rising interest rates and structural shifts in the demand for space have strained CRE markets and prompted concern about contagion to the largest CRE debt holder: banks. We use confidential loan-level data on bank CRE portfolios to examine banks' exposure to at-risk CRE loans. We investigate (1) what loan characteristics are associated with delinquency and (2) to what extent the portfolio composition of major CRE lenders determines their exposure to losses. Higher LTVs, larger property sizes, and greater local remote work tendencies are all associated with increased delinquency risk, ...
Working Paper
Loan Modifications and the Commercial Real Estate Market
Banks modify more CRE loans than CMBS, contributing to better loan performance when property incomes decline. However, banks have higher delinquency rates for less-stressed loans, consistent with modification policies encouraging strategic default. Motivated by these facts, we develop a tradeoff theory model in which lenders vary in their modification technologies. Modification frictions discourage strategic renegotiation, enabling CMBS to offer higher LTV loans and attract borrowers seeking higher leverage. The model produces cross-lender differences in LTVs and spreads consistent with the ...
Working Paper
Aggregate Implications of Deviations from Modigliani-Miller: A Sufficient Statistics Approach
A few sufficient statistics can identify the aggregate effects of distortions to firm investment in a class of general equilibrium models that can accommodate rich general equilibrium effects including endogenous firm entry. This result does not depend on the microfoundation of the distortion; one can generate inferences about aggregate effects that apply for multiple microfoundations or in cases where a fully specified model is difficult to solve. To demonstrate the relevance of themethodology, we use it to quantify the aggregate consequences of costly external equity financing and a ...
Working Paper
On Commercial Construction Activity's Long and Variable Lags
We use microdata on the phases of commercial construction projects to document three facts regarding time-to-plan lags: (1) plan times are long—about 1.5 years—and highly variable, (2) roughly 40 percent of projects are abandoned in planning, and (3) property price appreciation reduces the likelihood of abandonment. We construct a model with endogenous planning starts and abandonment that matches these facts. The model has the testable implication that supply is more elastic when there are more "shovel ready" projects available to advance to construction. We use local projections to ...
Working Paper
Across the Universe: Policy Support for Employment and Revenue in the Pandemic Recession
Using data from 14 government sources, we develop comprehensive estimates of U.S. economic activity by sector, legal form of organization, and firm size to characterize how four government direct lending programs—the Paycheck Protection Program, the Main Street Lending Program, the Corporate Credit Facilities, and the Municipal Lending Facilities—relate to these classes of economic activity in the United States. The classes targeted by these programs are vast—accounting for 97 percent of total U.S. employment—though entityspecific financial criteria limit coverage within specific ...