Delinquencies, Default and Borrowers' Strategic Behavior toward the Modification of Commercial Mortgages

This article constructs a model of mortgage delinquency which tests the extent to which borrowers anticipate a loan modification resulting from such a delinquency. Using a sample of modified loans from commercial mortgage-backed securities (CMBS), we estimate the present value of modified cash flows and project modification benefits each month for all CMBS loans which serve to proxy for a borrower's anticipation of a beneficial modification. Our results confirm a borrower's anticipation of a modification increases the delinquency hazard, and supports the theory that borrower delinquency is strategically endogenous.