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CRE Finance World, Summer 2012

Analyzing Special Servicer Performance We utilized a variety of sources to determine any transfers in Figure 3 special servicing2. For deals that have changed special servicers, Resolution Distribution by Loan Count we assume that the previous special servicer is responsible for the outcome of all loans that were resolved or modified within three months past the transfer date, as well as for all loans that were seriously delinquent for at least six months prior to the transfer date. When examining distributions by loan balance, we exclude the six loans with balance over $500 million which have an outsized effect on performance (Figure 2). However, we include these loans when examining distributions by loan count. Figure 2: Specially serviced loans with balance over $500mn Source: NSI, See Footnote 2 Figure 4 Resolution Distribution by Loan Balance Source: Trepp, NSI Resolution Distribution Over the past two years, special servicers have been actively resolving loans that have entered their portfolios, disposing of 57% by count or 47% by balance (Figures 3 and 4). The firms have cured an additional 17% by count, with a recidivism rate of approximately 10%. Among the three largest special servicers, LNR shows the highest resolution rate by count, at 64%. By balance, LNR and C-III report similar rates of 53%. LNR appears to prefer disposing of troubled smaller loans rather than pursuing workout strategies with the borrower. By both loan count and balance, the firm reports the highest disposition rate and the lowest cure rate. Source: NSI, See Footnote 2 Special servicer resolution by loan size At first glance, Midland appears to cure a significantly larger portion of their portfolio, at 31%. In contrast, LNR and C-III have Loans with larger balances are much more likely to have been cured, returned only 11% and 15%, respectively, to the master servicer. while special servicers tend to dispose of loans with balance under However, Midland’s percentage is slightly skewed due to the $10 million (Figures 5-7). Across the five special servicers, 38% of percentage of loans that have exited their portfolio upon transfer to loans with balance over $50 million have been returned to the master other special servicers. Most loans that entered Midland’s portfolio, servicer versus 14% for loans with balance under $10 million. but were later transferred, are assigned to the new special servicer, reducing the percentage of Midland’s unresolved loans. Even Resolutions of distressed smaller loans tend to result in higher loss accounting for this skew, Midland’s cure rate remains higher than severities due to fixed costs associated with disposing of assets. average. If we instead include the loans that since exited Midland’s Therefore, the loan size distribution of disposed assets is likely to portfolio due to transfers, their cure rate drops to 27%. influence historical loss severities. Special servicers that retain a more significant portion of smaller balance assets are likely to see an increase in future average loss severities. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 33


CRE Finance World, Summer 2012
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