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Term Default, Balloon Risk, And Credit Risk In Commercial Mortgages, Charles C. Tu, Mark Eppli
Term Default, Balloon Risk, And Credit Risk In Commercial Mortgages, Charles C. Tu, Mark Eppli
Finance Faculty Research and Publications
Term default and balloon risk play an interactive role in the pricing of credit risk in commercial mortgages. Most commercial mortgage pricing studies assume a borrower's default decision is based solely on the property value; the mortgage valuation model here also incorporates a property income trigger. The model considers both the risk of default during the term of the loan and the risk of loss at maturity (balloon risk). Monte Carlo simulation analyses reveal that pricing models based solely on property value overestimate the probability of term default and the resulting credit risk premium. Adding a property income default trigger …