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CRE Finance World, Autumn 2012

CMBS Servicer Commentary Could Be Improved — But May Also Be Indicating Large Impending Losses recommend that special servicers try to provide resolution language and potentially end the special servicer’s access to that ongoing whenever possible as it also obviously helps investors anticipate servicing fee (see CWCI 2006-C1 (BB), BACM 2007-5 (B-) and the bond’s future cash flow. For instances where the servicer is MLCFC 2006-1 (BB)). In these cases the special servicer has trying to reposition or improve a property’s leasing before disposition additional motivation to work longer on increasing the loan recovery, if would be helpful if they expressly state that intention with a as they are likely receiving $1 million–$3 million in annual servicing potential future stabilization and resolution date. fees from the transaction until their bond investment on specific control class is formally extinguished. Conclusion: Dated Servicer’s Comments May Indicate A Hesitancy To Realize Embedded Losses – Not Necessarily A This servicer delaying behavior may suggest that quick liquidations Bad Outcome do not limit losses as much as it suggests that the negative selection The special servicer comments listed in this article were randomly or putting off significant embedded losses extends workout periods. selected from multiple transactions with the intent of providing a So we are concerned that the data which demonstrates longer sample and should not be reviewed looking for perfect grammar or workout periods create larger losses may not be actually caused prose. From that standpoint, our review focused on the helpfulness by the time period as much as it is due to the special servicer’s of the content flowing through to the investment community. motivation to avoid large losses. As these advances build, the master servicer will hopefully stop advancing on these large loss Analyzing the data we would note that several of the larger loans cases in order to limit the damage to overall transaction. This would that have been REO for some time appear to have large embedded simply leave the special servicer the opportunity to demonstrate losses and have gone several months without an information their “hoped for” property value improvement, which in some update or mention of any disposition plans. This is surprising as cases could yet prove to be a prudent approach, given the size at the last CREFC convention four major servicers stressed that of the losses already quick resolutions limit the transaction losses. Yet looking at the “The CMBS process does embedded in these Appendix, we see that the master servicer’s advances and ASERs not really reward the special troubled loans. In on many of these larger REO loans are sometimes approaching servicer for providing the the past we would be the amount of the most recent appraisal. We have generally been latest information to investors. concerned that this unable to tie the advancing and ASER accruals to actual cash Therefore, it was not too potential delaying of flows when the property is REO as we do not electronically have great a surprise that information losses was hurting the underlying recent financial performance that we would need quality was at times obviously CMBS investors, but to anticipate the growth of these advances. Yet in many of these subpar from all servicers.” given the losses are extremely slow recovery and large embedded loss cases, we already embedded, wonder if the lack of comment is just human nature as nobody and the higher wants to explain how their workout strategy failed to keep up with mid-investment grade the accruing advances. bonds could get paid interest shortfalls from any surprise recovery, the detected delay in large loss realization would appear to be We should also note that the Appendix lists the lowest outstanding benefitting more than just the special servicers. From a CMBS class which at the BB+ level, usually represents the controlling investors standpoint the trends we are seeing in servicer commentary class that grants the special servicing rights for the transaction. suggests it is important to consider the outstanding bond classes Over the past year, several special servicers have lost servicing when assessing a buildup in aging REO loans as the realization of assignments, as their control of the transaction ended with the those loan losses may be related to when or whether the BB+ class elimination of the subordinate BB+ or BBB- class that they originally will be eliminated. Overall, this delay large loan loss approach and purchased. Among the deals that we reviewed the Midland serviced the potential for a surprise recovery on some of these underwater transaction actually had no REO loans which may be related to how REO loans does suggest that the senior sequential structure of few 2007 transactions they now service as they do seem to have CMBS along with the alignment of servicing with ownership is lost multiple special servicing assignments. So with a couple of actually motivating CMBS participants somewhat as it was originally our example transactions having only the BB class outstanding, intended. We just wish the special servicers were more proactive the special servicer is also motivated to delay taking the larger and timely in using the delinquency and REO commentary fields potential embedded losses that would eliminate the BB+ class in disclosing their improvement/disposition plans. CRE Finance World Autumn 2012 34


CRE Finance World, Autumn 2012
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