Author: Luis C. Mejia

Start Page: 175
End Page: 196
Volume: 18
Issue Number: 1
Year: 1999
Publication: Journal of Real Estate Research

Abstract: This study uses a structural equation approach to assess the presence of a credit supply effect in the commercial mortgage market and the lenders' ability to incorporate expectations about this effect into their lending policies. A credit supply effect is defined as the effect of mortgage supply on the level of loan defaults. The empirical analysis shows two important results. First, changes in loan defaults appear to be followed by changes in commercial mortgage supply with a lag of approximately four to five years. Second, lenders tend to behave myopically, failing to incorporate expectations about the credit supply effect into their lending policies. Additionally, a simulation suggests that adequate timing of the mortgage supply cycle is crucial in limiting the incidence of mortgage default.