Analyzing Special Servicer Performance

CRE Finance World, Summer 2012

Analyzing Special Servicer Performance1 Lea Overby Steven Romasko Head of CMBS Research, Executive Director CMBS Research, Analyst Nomura Securities International Nomura Securities International C and 47% of this loan balance has been resolved. Market share (by balance)Figure 1urrently, $70.5 billion of CMBS assets are in specialservicing, representing 12.6% of outstanding conduitbalance. Since January 2008, almost $150 billion in fixedrate conduit loans has been transferred to special servicing, We examine the characteristics of loans that have been specially serviced, and we provide an analysis of the portfolios and strategies employed by the five largest special servicing firms — LNR, CWCAM, C-III, Midland, and Torchlight. All five of these firms have extensive histories of commercial real estate asset management, and their employees tend to have very long tenures at the firm and within the industry. Together, these firms account for 92% of all specially serviced loans by balance and 89% by count. Source: Trepp, NSI We include an overview of these firms’ strategies as an appendix (Figure 16). In general, we find that: Three firms dominate the legacy special servicing market and are named special servicer for 77% of all domestic conduit deals by •Three firms, LNR, CWCAM, and C-III, dominate the legacy special outstanding balance and 68% by deal count (Figure 1). Overall, servicing market and are named special servicer for 77% of the LNR is the largest special servicer and is named special servicer domestic conduit universe by outstanding balance and 68% by on 25% of all conduit transactions. In August 2011, C-III solidified deal count. Two additional special servicers, Midland and Torch- their position as one of the three largest special servicers with light, have been actively pursuing special servicing assignments their purchase of J. E. Robert’s portfolio, adding 17 CMBS deals for new issue CMBS deals. with current balance of $33 billion. Currently CWCAM and C-III have similar market share and are each named special servicer on •Among these special servicers, LNR appears most likely to dispose 22% of conduit deals. of a troubled asset rather than continuing to work with the borrower in place. LNR has both modified and cured significantly Two additional special servicers, Midland and Torchlight, have been fewer loans than other special servicers and has the highest actively pursuing special servicing assignments for new issue disposition rate for smaller balance loans. transactions. Midland now specially services the majority of new issue deals, and transactions issued since January 2010 account for •CWCAM appears most likely to take title to a property prior half of their portfolio. Torchlight has been named special servicer to disposition. For assets that were seriously delinquent prior to on three new issue conduit deals totaling $4.2 billion, JPMCC resolution, almost half of those specially serviced by CWCAM 2011-C4, JPMCC 2011-C5, and GSMS 2011-GC5. In contrast, were REO, versus an average of 32% across the top five servicers. CWCAM and LNR are each specially servicing two new issue deals totaling $2.1 billion and $1.4 billion, respectively, and C-III •C-III appears to be focusing on pursuing quicker resolution times. has yet to participate in the new issue market. Although a quarter of its resolved assets spent more than 18 months in special servicing, its current portfolio contains fewer Special Servicer Performance aged assets than other special servicers, at 41% versus the Using the set of conduit loans that have been transferred to average of 50%. each special servicer since January 2008, we analyze various stratifications to highlight differing strategies, examining a servicer’s •Midland and Torchlight appear to be the most likely to work tendency to modify or take title, the amount of time elapsed with the borrower in place, reporting both higher cure rates and until disposition, and loss severity. We find distinctions between modification rates, but longer-than-average time in special servicing. the special servicers’ strategies and variations in average loss Although Torchlight’s performance is based on fewer data points, severities across the firms. In addition, we see differentiations in the firm reports the lowest weighted average loss severity for weighted average loss severity and find further contrasts when loans secured in 2005-08 vintage deals, at 31%. Midland reports examining deal-level losses. the second lowest, at 34%. CRE Finance World Summer 2012 32


CRE Finance World, Summer 2012
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