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CRE Finance World, Summer 2013

A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 61 Chart 6 Probability of Modification Given Default The relationship between liquidation time and loss severity was also observed during and after the Great Depression when CRE bond (loan) workouts sometimes took up to 20 years or more. The longer workouts typically translated into greater losses (including liquidation expenses). This was despite the benefit of many resolutions occurring in the period immediately after World War II, which was one of the strongest periods of economic growth for the U.S.5 Whether the negative impact of longer liquidation times trumps the benefit of liquidating in better market conditions for CMBS is something that remains to be seen.6 Right now, shorter liquidation times seem to provide some benefit, but this is a tenuous conclusion to make as correlation and causation are not entirely clear: On one hand it is probable that longer liquidation times could adversely affect recoverable value (value maximization may best be done by CRE investors), but it is also plausible that properties that have lower values simply take a longer time to liquidate. Modifications Chart 7 Value Decline and Loan Size Value declines have been meaningfully more acute for small and medium sized loans (loans < $8 million) with very large loans suffering on average five percentage points less price declines at liquidation. The recurrent theme of loan size and its impact on liquidation price decline is probable, but at times difficult to differentiate between pure size considerations and the fact that large loans get significantly more attention from the special servicer. Very large loans are simply too impactful to the CMBS waterfall to be ignored, and have a significantly greater chance to be modified than smaller loans. Of 15,617 loans in our data set that have defaulted since the 1990s (and the 12,882 that were at one time specially serviced), just 12% of them were modified (with nearly all modifications occurring during and after the Great Recession). But there is a vast difference across loan size, with 29% of very large defaulted loans being modified and just 6% of small loans being modified. Chart 8 Probability of Modification (given default) Anatomy of a Loss


CRE Finance World, Summer 2013
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