Complexity and Loan Performance : Evidence from the Securitization of Commercial Mortgages

Between 2001 and 2007, the complexity of commercial mortgage-backed securities (CMBS) increased substantially. The median size of commercial mortgage loan pools tripled and the median number of AAA-rated tranches doubled. I examine whether deal complexity is related to loan performance by analyzing a sample of approximately 40,000 commercial mortgage loans from 334 CMBS deals. I find that loan performance is worse for loans in more complex securitizations. However, neither the price of a deal's securities nor a deal's risk retention reflected that complexity correlates with lower loan quality. These findings present a challenge for theories of optimal security design