Recourse as shadow equity: Evidence from commercial real estate loans |
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Authors: | David Glancy Robert Kurtzman Lara Loewenstein Joseph Nichols |
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Affiliation: | 1. Division of Monetary Affairs, Federal Reserve Board, Washington, D.C., United 2. States;3. Division of Research & Statistics, Federal Reserve Board, Washington, D.C., United 4. Federal Reserve Bank of Cleveland, Cleveland, United  |
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Abstract: | 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 as a substitute for conventional equity. At origination, recourse loans have rate spreads that are about 20 basis points lower and loan-to-value ratios that are almost 3 percentage points higher than nonrecourse 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, and the modifications that did occur entailed a relatively smaller reduction in payments. |
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Keywords: | commercial real estate LTV recourse |
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