Essays on banks' resolutions of problem mortgage loans
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This dissertation examines banks' resolution of distressed commercial mortgage loans. Following the introduction in the first chapter, the second chapter reviews the literature on banks' resolutions of distressed loans. In chapter 3, I present a model of banks' resolution decisions under information asymmetry. The model shows that banks prefer to renegotiate instead of foreclosing problem loans when there is a cost associated with revealing the quality of their mortgage portfolios. The fourth chapter presents empirical findings that are consistent with the model, i.e., that banks' resolution decisions are affected by their concerns of revealing negative information through large foreclosures. I find that larger loans are more likely to be renegotiated than smaller loans and that banks take a shorter amounts of time to renegotiate rather than to foreclose on problem loans. Secondly, the impact of loan size on the propensity to renegotiate is magnified for banks with superior past performance and for banks with lower local mortgage distress. In addition, I find that banks that raised new equity capital exhibit a stronger tendency to renegotiate larger problem loans in the previous year. In chapter 5, as a falsification test, I compare the bank-held sample with a Commercial Mortgage Backed Securities (CMBS) sample that does not share banks' mimicking motives, because special servicers of problem loans are not the originators of those loans. I find that the results are weaker or not present for CMBS, in contrast to the bank loan sample. In chapter 6, I study banks' resolution of problem loans while considering their problem loan portfolios. I consider two aspects of banks' problem loan portfolios -- their relationships with borrowers and the degree of regional diversification. Empirical results suggest that the sample banks choose to act "tougher", i.e., foreclose more, as they have more loans with a borrower. Finally, the degree of geographical diversification in problem loan portfolios may affect banks' resolution decisions. I find that as banks have geographically concentrated problem loan portfolios, they are more likely to renegotiate larger loans, measured either absolutely or relatively. Chapter 7 concludes.