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CRE Finance World, Winter 2012

CMBS Special Servicer Behavior — As Subordinate Bond Positions Evolve From Investments to Fee Generators Senior Managing Director,Darrell Wheeler or Fair Market Value Options Amherst Securities Group LPHead of CMBS Strategy I changed hands to opportunistic investors or funds. Many of CMBS Origination and Administration DiagramExhibit 1n the past year, ownership of several special servicers hasthese special servicers owned the underlying subordinatebonds in the transactions they service while others simplyprovided the servicing loan resolution function. In our primer we highlighted how this structure motivates servicers to maximize recoveries, but as their underlying collateral is written down there could be other motivations such as maximizing fee revenue or opportunistic real estate investing. To consider this we look at the post 2009 troubled loan experience, and focus on the resulting appraisals, note sales, modifications or liquidations. We specifically consider the servicer’s economic position within the transaction at the time of the action was taken and do find that so far special servicers have been more inclined to liquidate the loans once the BB+ balance was written down to less than 25% of the original balance (when the controlling right is transferred) or become 0. We would caution that so far this result is based on a limited sample of 52 loan resolutions, but it does suggest that investors could anticipate an increase in liquidations as subordinate classes get extinguished. We also compare liquidation and modification rates among special servicers and find some interesting nuances about their different behaviors. Special Servicer Ownership Raises Questions On Conflicts and Fees In our primer1 on CMBS we highlighted that potential conflicts of interest arise when a special servicer owns the BB+ and lower bonds on the same transaction. We also discussed the benefits of having a self motivated servicer work for investors as the servicer’s vested interest causes it to proactively review the pool at origination, reject potential risks before closing and then create reps and warranty enforcement during the transaction life. In that article, we used Exhibit 1 below to discuss the CMBS loan origination process and the functions provided by each party. Source: Amherst Securities Group LP A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 29


CRE Finance World, Winter 2012
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