Value Creation through Securitization: Evidence from the CMBS Market |
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Authors: | Xudong An Yongheng Deng Stuart A Gabriel |
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Institution: | (1) Department of Finance, College of Business Administration, San Diego State University, 5500 Campanile Dr., San Diego, CA 92182-8236, USA;(2) Lusk Center for Real Estate, School of Policy, Planning and Development, University of Southern California, 650 Childs Way, RGL 201A, Los Angeles, CA 90089-0626, USA;(3) Richard S. Ziman Center for Real Estate, Anderson School of Management, University of California at Los Angeles, 110 Westwood Plaza, Los Angeles, CA 90095-1481, USA |
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Abstract: | Despite recent volatility and constraints in secondary market funding, analysts have ascribed substantial value creation to
the securitization of commercial mortgages. Such value creation likely emanates from liquidity enhancements, regulatory arbitrage,
price discrimination and risk diversification by pooling and tranching, gains from specialization in origination, servicing,
and holding of mortgages, and the like. Indeed, such value creation would be consistent with past accelerated growth in the
mortgage- and asset-based securities markets and the sizable profits earned by secondary market intermediaries. In this paper,
we estimate the pricing effects of commercial mortgage securitization. We do so by applying loan level data from 1992–2003
to compare the pricing of conduit and portfolio loans held in CMBS structures. In contrast to portfolio loans, which are held
for investment by originating institutions, conduit loans are originated for the sole purpose of sale and securitization in
the secondary market. If securitization creates value, it should be evidenced in the relative pricing of conduit loans sold
into CMBS pools and in a lower cost of capital to loan originators. We estimate a reduced-form model, in which the interest
rate spread between commercial mortgages and comparable-maturity treasury securities varies with loan characteristics, capital
market conditions, and conduit loan status. Estimation results indicate that securitization of conduit loans leads to an 11
basis points reduction in commercial mortgage interest rates. We assess robustness of results via hazard model tests for omitted
variables and originator-specific effects. We further estimate a simultaneous equations model that accounts for the potential
endogeneity of mortgage loan terms to the mortgage-treasury rate spread. Results of that analysis suggest a larger 20 basis
points reduction in loan pricing among conduit loans sold into CMBS structures. |
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