TITLE:
A Real Options Approach to Distressed Property Borrower-Lender Reconciliation
AUTHORS:
David J. Moore, Nuriddin Ikromov
KEYWORDS:
Real Option, Real Estate, Restructure, Distressed Property, Market Value
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.5 No.1,
February
25,
2015
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.