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The Other View ___________________________
Although speculation is ripe in the industry regarding the outlook for distressed CMBS loans, Mortgage Bankers Association’s Vice Chairman E.J. Burke told Scotsman Guide that he does not foresee a giant wave of defaults as a result of loans that are maturing this year.
“There are going to be a lot of loan maturities that are going to have a tough time refinancing. You are going to see a lot of extensions or modifications entered into between special servicers and borrowers,” he said.
He does not deny that CMBS delinquencies remain a concern, however. “In the commercial bank area, [delinquencies] are still elevated, although they are coming in and improving. CMBS is way out there. They are improving but they are not in a healthy range,” he said.
For more from Burke, read this month's Q&A.
Remember that the special servicer is appointed by the CCR that is the first in line to suffer a loss. Therefore, as losses occur on loans and pools, the position of the CCR will move up the bond stack. Currently, some of the worst-hit pools are suffering losses all the way to the AAA-rated borrowers, and the same scenario may be repeated if a second wave of delinquencies hits.
When a special servicer is forced to make a decision on the appropriate resolution of a loan, it is bound by a servicing standard that basically says that it must take the action that will result in the highest recovery and the least loss for all the bondholders, regardless of its own personal position in the bond stack or its monetary gain.
Yet it is clear by the statistics that the current special-servicers bond position impacts its decision. Remember that the special servicer receives a 1 percent fee upon resolution from the trust — regardless of the resolution.
If — and this is merely a hypothetical — the special servicer that is owned by an opportunistic fund had invested a large amount of money in a particular pool, and its current position in the bond stack meant that it would not be in a position to get any more fees on that pool, it might be encouraged to take a quicker action on defaulted loans to get the 1 percent fee. This has been referred to by some as the fast-resolution versus the patient servicer.
Another course of action for these special servicers is to buy the bonds at the next level in the bond stack, and that is currently a significant focus of some of these opportunistic funds. The debate over fast-resolution versus patient special servicers likely will come up in the CMBS industry more frequently this year as special servicers’ positions are being wiped out.
The first wave of delinquencies has hit the beach, and the industry has been dealing with the ups and downs of its aftermath. The question now is whether a second wave is within sight and how much damage it could cause.
Ann Hambly is founder and co-CEO of 1st Service Solutions, a borrower-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 firstname.lastname@example.org.
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