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Article
Extension Risk in Commercial Mortgages
Real Estate Finance
  • Charles C. Tu, California State University - Fullerton
  • Mark Eppli, Marquette University
Document Type
Article
Language
eng
Format of Original
11 p.
Publication Date
1-1-2002
Publisher
Wolters Kluwer/Aspen Publishers
Abstract

Historical data and Monte Carlo simulation is used to examine the likelihood of loan extension and potential losses associated with extension. It is found that extension probability is highly sensitive to property NOI growth, to NOI volatility, to the amortization schedule, and to the loan term. It is found that extension risk is largely unaffected by changing credit spreads, changing yield curve assumptions, and changing term default assumptions. It is found that changing the underwriting standards affects the probability of loan extension in a somewhat muted way. It is estimated that the loss during extension is approximately 2%-3% of the outstanding loan amount at maturity.

Comments

Accepted version. Real Estate Finance, Vol. 18, No. 4 (Winter 2002): 53-63. Publisher Link. © Aspen Publishers (Wolters Kluwer) 2002. Used with permission.

Mark Eppli was affiliated with George Washington University at the time of publication.

Citation Information
Charles C. Tu and Mark Eppli. "Extension Risk in Commercial Mortgages" Real Estate Finance (2002) ISSN: 0748-318X
Available at: http://works.bepress.com/mark_eppli/9/