Commercial Real Estate Loan Default Frequency

Abstract

Capital allocation decisions become an even tougher issue without a consistent measure of credit risk across the entire portfolio. Although available risk management systems are helpful for a number of asset classes, none provides an adequate solution for real estate credit risk. With few appropriate inputs, and a notable lack of data on commercial mortgage default experience, an alternative approach to assessing real estate loan expected default frequency is needed. The authors discuss the calibration of a systematic risk metric to actual historical defaults. A comparison of the disaggregated results to those of past studies of defaults indicates that the metric appears to be a robust and useful tool for exposing opportunities and improving capital allocation decisions.