Asymmetric Information, Adverse Selection, and the Pricing of CMBS

61 Pages Posted: 18 Jun 2010 Last revised: 9 Apr 2011

See all articles by Xudong An

Xudong An

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management

Date Written: June 4, 2010

Abstract

We demonstrate that asymmetric information between sellers (loan originators) and purchasers (investors and securities issuers) of commercial mortgages gives rise to a standard “lemons problem”, whereby portfolio lenders use private information to liquidate lower quality loans in CMBS markets. Conduit lenders, who originate loans for direct sale into securitization markets, mitigate problems of asymmetric information and adverse selection in loan sales. Our theory provides an explanation for the pricing puzzle observed in CMBS markets, whereby conduit CMBS loans are priced higher than portfolio loans, despite widespread belief that conduit loans are originated at lower quality. Consistent with theoretical predictions of a “lemons discount”, our empirical analysis of 141 CMBS deals and 16,760 CMBS loans shows that upon controlling for observable determinants of loan pricing, conduit loans enjoyed a 34 bps pricing advantage over portfolio loans in the CMBS market.

Keywords: CMBS, conduit lending, asymmetric information, lemons discount

JEL Classification: G14, G12, D82

Suggested Citation

An, Xudong and Deng, Yongheng and Gabriel, Stuart A., Asymmetric Information, Adverse Selection, and the Pricing of CMBS (June 4, 2010). Available at SSRN: https://ssrn.com/abstract=1626007 or http://dx.doi.org/10.2139/ssrn.1626007

Xudong An (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://bus.wisc.edu/faculty/yongheng-deng

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-2922 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://www.anderson.ucla.edu

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