A Real Options Approach to Distressed Property Borrower-Lender Reconciliation

David J. Moore, Nuriddin Ikromov

College of Business Administration, California State University, Sacramento, CA, USA.

DOI: 10.4236/jmf.2015.51007                

Abstract

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.

Keywords

Real Option, Real Estate, Restructure, Distressed Property, Market Value

Conflicts of Interest

The authors declare no conflicts of interest.

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