Quiz 16: Commercial Mortgage Types and Decisions

Business

We are given the following request for consideration: Discuss several differences between long-term commercial mortgages and their residential counterparts. • Residential mortgages use information about borrower to qualify for a loan. For a commercial mortgage, the lender considers the building and the cash flow it produces. • Residential mortgages typically have 20-, and 30-year terms. Commercial mortgages typically have 5- to 10-year terms. • Residential mortgages usually don't have restrictions on prepayment. Commercial mortgages usually have restrictions on prepayment. • Residential mortgages follow a standard form and set of rules. Commercial mortgages do not have a standard form and set of rules. • Residential mortgages are the personal responsibility of the borrowers. Commercial mortgages are usually nonrecourse.

B. Default risk.

(a) Financial risk: Financial risk refers to the possibility of loss in an investment. It also describes the likelihood that company may default on bonds resulting in a loss for bondholders. (b) Financial leverage means higher risk with investments. Although the returns will be higher on income property that is performing well; however, when that property is not doing well, the returns are exponentially poorer. Even though higher returns are expected with higher risk, as more is leveraged the risk remains high and the returns decrease. Hence, the expected increase in return from the use of debt may not be adequate to offset the increase in risk.