A Real Options Approach to Distressed Property Borrower-Lender Reconciliation


We propose a real option framework to value distressed properties and restructure their loans. Our approach reconciles the interests of borrowers and lenders through a constrained optimization model yielding mutually beneficial restructure terms. Borrowers receive lower loan balances and payments, while lenders replace non-performing loans with performing loans that have higher market values. A numerical illustration shows that the market value of a restructured loan can exceed that of the original non-performing loan and the post-foreclosure cash flows when the lender repossesses the property.

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Moore, D. and Ikromov, N. (2015) A Real Options Approach to Distressed Property Borrower-Lender Reconciliation. Journal of Mathematical Finance, 5, 73-81. doi: 10.4236/jmf.2015.51007.

Conflicts of Interest

The authors declare no conflicts of interest.


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