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CRE Finance World Summer 2015
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(“WODRA”) to the PSA in late 2003. WODRA provided a mechanism
for master servicers to recover advances from principal collections
first as the result of workouts in which the applicable borrowers
were specifically obligated to pay such advances. In CMBS 2.0
PSAs (mostly PSAs issued 2010 or later), the industry adjusted
the waterfall for liquidation proceeds to properly account for the
intentions of the ASER. In the new PSAs, recoveries of ASERs are
after principal repayments, allowing for higher rated bonds to recover
their principal before subordinate classes recapture interest.
Whereas CMBS 1.0 PSAs generally directed that recoveries on
any loan be allocated to unpaid interest prior to being allocated
to unpaid principal, CMBS 2.0 PSAs generally (and particularly
with respect to liquidation proceeds) direct that recoveries on any
loan be allocated to unpaid interest less the portion of any interest
that was not advanced due to an Appraisal Reduction Amount
(Appraisal Reduced Interest) prior to being allocated to unpaid
principal and then only allow for allocations to recover Appraisal
Reduced Interest once unpaid principal has been recovered in full.
The impact of this change is illustrated below in the comparison
of the hypothetical liquidation waterfall with outstanding ASERs in
CMBS 1.0 and CMBS 2.0 deals.
Exhibit 1
As illustrated above, in CMBS 2.0, the principal loss to the trust is
less than in CMBS 1.0 due to the ASER recovery mechanics. In
CMBS 1.0, the ASER recovery would have been passed through
to the subordinate bond holders instead of the more senior bond
holders. Allocating the first loss to the most subordinate bondholders
is the true intention of the ASER concept.
This change to waterfall calculations will have a substantial impact
on many different CMBS constituents. We have not yet seen any
post-CMBS 2.0 losses that would follow this new waterfall convention;
however as an industry it is time for us to be prepared for the first
one. Master servicers, special servicers, trustees, and certificate
administrators should be training their staff on what to look for in
the PSA to make sure they are following the proper conventions.
The CREFC IRP committee needs to revisit the current Realized
Loss Templates to determine if adjustments are required to handle
the reporting for this allocation. Rating agencies must make sure
their models are aligned with the PSA waterfall definitions to
properly account for the potential impacts. Lastly, investors need to
be aware of which of their holdings could potentially be impacted
by these changes. Proactively addressing this change will prevent
us from marketplace surprises, something no one in the CMBS
industry wants to see.
1 See Trepp Outstanding Advances. Excel Spreadsheet (Trepp, LLC, New
York, N.Y.), March 24, 2015.
2 According to Trepp, LLC data the total amount of ARAs (in 000s) for (1)
loans originated in 2006 is $2,232,505, (2) loans originated in 2008 is
$2,484 and (3) loans originated in 2010 is $570. See Origination Year
by Appraisal Reduction Stratification Matrix. Excel Spreadsheet (Trepp,
LLC, New York, N.Y.), March 24, 2015.
ASERs 2.0: Who Gets the Short End of the Stick?