resolution of defaulted loans because that is what will
cause their loss.
Nearly 85 percent of the total current CMBS pools were
originated and securitized in 2005, 2006 and 2007. When
those special servicers were being assigned, there were
few defaults in the industry, and special servicers were
staffed based on this level of defaults.
When the first wave of defaulted loans came rushing
into the special servicing shops in late 2008 and through
the first half of 2010, they were not able to handle all the
defaults. Accordingly, delinquency rates increased, and so
did special-servicer costs. Because of skyrocketing costs
and low profits, most special servicers required recapitalization themselves.
The top three special servicers in the industry, which account for nearly 75 percent of all the business, had the following ownership changes in 2010:
• lnr was recapitalized by a consortium of five opportunistic buyers of commercial real estate.
• centerline was bought by Island Capital and changed its name to C-III.
Island Capital also acquired J.E. Robert Company Inc.
• cwcapital was bought by Fortress.
The important point about these ownership changes is that these special servicers are now owned by companies that have more aggressive
“real estate like” return targets. They also have alternative investment
motivations, which can make a difference in their decisions regarding the
resolution of defaulted loans.
Source: Morningstar Credit Ratings LLC
Jan ’ 10 Jan ’ 11 Oct ’ 11
The grounds for these concerns may be valid. Many of the loans that were originated in the 2007 commercial real estate bubble will mature this year. Additionally, the second half of this past year witnessed a curtailing of new
CMBS issuance, which puts further upward pressure on the delinquency
rate, according to Trepp.
Delinquency rates of distressed CMBS seemed to be on track to improve
by the end of this past year, declining 26 basis points to 9.51 percent this
past November. This was the second biggest drop in ’ 11, after a drop of 36
basis points in August. The rate had fallen for four out of the first eleven
months in this past year, according to Trepp.
This positive change, or the leveling off in CMBS defaults, is unlikely to be
sustainable this year. There has been a large amount of resolutions made
in the past 18 months that contributed to this apparent leveling-off activity.
Although the aftermath of the last crisis seems to be behind us, the industry
is at risk for another giant wave of delinquencies that is likely to hit this year.
Commercial mortgage brokers must keep this in mind and remain on top of
the changes in the CMBS industry, which can affect the lending environment.
Before addressing the types of resolutions that have been made so far, it
is important to get an overall picture of the special servicers because they
are responsible for handling and resolving all distressed CMBS loans.
Special servicers are assigned at the securitization by the controlling-class representative (CCR) — that is the owner of the lowest tranche of
bond, which are the ones with the first loss and highest risk. It makes
sense that the owners of first-loss bonds would want to control the
Sources of fees
Before these ownership changes, there were two primary ways that a special servicer could earn fees:
1. a special servicing fee: Equal to 25 basis points of the outstanding principal balance of the loan it is resolving
2. a disposition fee: Equal to 1 percent of the outstanding balance of the
loan as it is resolved, either through a modification, sale of real estate
owned (REO) property or reinstatement of the loan
Today, there are many other ways a special servicer earns fees through
its affiliations — sales and brokerage listings for REOs to name two. This
clearly calls into question the motives of a special servicer when con-
fronted with a defaulted loan.
continued on page 40 »
Let’s go back and look at the resolutions that led to some sort of leveling off in delinquency rates. There has been $82 billion in CMBS loans
Ann Hambly is founder and co-CEO of 1st Service Solutions, a bor-rower-advocacy company based in Grapevine, Texas. 1st Service
Solutions has successfully restructured more than $5 billion of
commercial mortgage-backed securities (CMBS) loans on behalf
of borrowers and has more than $6 billion in process today. Reach
Hambly at (817) 756-7220 or email@example.com.
Although;speculation is ripe;in the
industry regarding the outlook for
distressed CMBS loans, Mortgage
maturities that are going to have a
they are coming in and improving.
For more from Burke, read the Q&A
with him on Page 16.
Te Ot er View