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Delinquency and Default of Securitized Hotel Mortgages

We specify and estimate a structural model of securitized hotel mortgage delinquency and default. Using a unique loan-level panel database, we are able to distinguish between various stages of loan distress prior to the default state. We view arriving at these states as the outcome of a dynamic programming problem solved by the borrower thus our structural model captures the decision making process of the borrower at the loan level. This structural approach can potentially yield a better predictive model of the default and delinquency decision even in economic environments the CMBS market has yet to experience such as during an downturn in commercial real estate prices. We are also able to incorporate contemporaneous property level performance measures from our access to competitive set information for each hotel from Smith Travel Research. Another innovation of our paper is the use of a cumulative wealth variable which captures the performance of the property in prior periods to explain the subsequent delinquency or default decisions. We find that despite the increased complexity of our model, reasonable results were obtained.