@article {Eppli114, author = {Mark J. Eppli and Charles C. Tu}, title = {Who Bears the Balloon Risk in Commercial MBS?}, volume = {31}, number = {5}, pages = {114--123}, year = {2005}, doi = {10.3905/jpm.2005.593894}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Much of the literature on the pricing of commercial mortgages underlying commercial mortgage-backed securities pools focuses on the effect of term default (default during the term of the loan), and ignores the possibility of balloon risk, the borrower{\textquoteright}s inability to pay off the mortgage at maturity through refinancing or property sale. A contingent-claims mortgage pricing model that includes two default triggers{\textemdash}a cash flow trigger and an asset value trigger{\textemdash}may be used to assess the effect of balloon risk on the pricing of CMBS tranches. Simulations of cash flows for individual loans in a CMBS framework reveal how individual tranches are affected by balloon risk. Balloon risk is low at the whole-loan level, but under a number of scenarios total credit risk and balloon risk creep into investment-grade CMBS tranches and significantly impact their valuation.}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/31/5/114}, eprint = {https://jpm.pm-research.com/content/31/5/114.full.pdf}, journal = {The Journal of Portfolio Management} }