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CRE Finance World, Winter 2012

CMBS Special Servicer Behavior — As Subordinate Bond Positions Evolve From Investments to Fee Generators or Fair Market Value Options Exhibit 4 special servicers’ behavior does appear to be predictable, as they Loan Resolutions Sorted by BB+ Status liquidated 17 loans and modified only 1 loan. This has us thinking that liquidations may pick up in later years as the BB+ class is eliminated, yet many of these liquidations are from some of the worst deals of 2006 and 2007 and appear to be smaller loans that were aggressively underwritten. So, further defaults in those deals are likely still being evaluated fairly and it may be too early for us to consider adjusting our current parameters for extensions. As we gather more resolution and workout data from recent vintage issuance and actually have time to see some modifications we will have to continue to evaluate the liquidation versus modification behavior. So, we still think it is still possible that servicers may still prove to be more inclined to modify larger loans in order to maximize fees even after the BB+ class is eliminated. But with this liquidation behavior we also wanted to see if there were any trends that could be detected by specific special servicer so we repeated the loan resolution table in Exhibit 5 below. Exhibit 5 Loan Resolutions Sorted by Special Servicer Source: Amherst Securities Group LP, Intex Data Solutions Looking at the first table we see data for transactions that still have their original BB+ class outstanding and there appears to be a balance between servicer inclination to modify or liquidate loans. In this “pre-write off state” servicer behavior seems to be best pre- dicted by loan size: larger loans are more likely to be modified and smaller loans are more likely to be liquidated4. The average size of modified loans is $38 million while the average for liquidated loans is $9 million. It is also interesting to note that the loans that are still in special servicing have average size of $20 million, between the average size of modified and liquidated loans. We have suggested in the past that this trend indicates special servicer is modifying large loans, liquidating small ones and sitting on the fence about middle ones. This is why we designed our CMBS ALIAS system to allow us to underwrite specific potential loan modifications and have undertaken to look at our additional third party data for all troubled loans over $10 million and consider potential modification outcomes for each situation. Source: Amherst Securities Group LP, Intex Data Solutions Initially, the numbers suggest behaviors are similar among all special However, looking at the two lower tables of loan resolutions where servicers: larger loans get modified and smaller ones are liquidated. the BB+ class gets reduced or decreases below 25% of the its However, there are also some significant difference that Clarion original balance we do see a disturbing propensity to liquidate Partners serviced deals have undertaken the most modifications loans and result in higher loan loss severities. In these cases the at 66% while CW Capital, LNR, and Midland have only modified A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 33


CRE Finance World, Winter 2012
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