Page 62

CRE Finance World, Summer 2013

Chart 3 CMBS Value Decline and ACLI Originations Chart 4 CMBS Value Decline and U.S. Unemployment Rate This may suggest that special servicer strategies during the recession to change or influence the timing of liquidation by extending loans and deferring losses were smart but, as evaluated below, it may be too early to tell. At the time of this publication, there are enough modified loans outstanding (and thus excluded from the liquidation statistics) to alter our view. Liquidation Time — Extend and Pretend? Time can also impact value decline, in terms of how long it takes for a loan to be liquidated after its transfer to the special servicer. The more time a loan is with the special servicer the more severe the value decline in our dataset. This observation has several CRE Finance World Summer 2013 60 important ramifications to the decisions by the special servicer on whether to realize losses as quickly as possible or to extend liquidation in hopes of a better economic environment or improved property performance. Our data show that lower liquidation prices are correlated with longer liquidation times, and that this remains so regardless, largely, of vintage, liquidation date, size and property type. Chart 5 Value Decline and Liquidation Time The chart above demonstrates this relationship but also illustrates the noise inherent to this (and other) loss data metrics described in this commentary. Empirical losses will often behave in line with expectations on average, but predicting losses on individual workouts in advance would have greater inaccuracy due to the granularity of property level considerations, not to mention borrower behavior. As noted before, the primary driver of value decline remains unemployment and/or market liquidity; it would makes sense if loans that were modified or extended in order to avoid immediate liquidation in an unfavorable economic environment would experience lower value declines. Longer liquidation times could mean more time for cash flows to rebound, which is especially relevant for CRE delinquency that is a result of tenant rollover or otherwise depressed occupancy. In addition, longer liquidation times allow time for liquidity and value to return to the market. Looking at the frequency of modifications across loan size and DBRS’s market index4 would suggest that this dynamic is taking place — special servicers seem more likely to modify loans that have inherent stability and are located in what have historically been more liquid markets that are likely to bounce back. Anatomy of a Loss


CRE Finance World, Summer 2013
To see the actual publication please follow the link above