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CRE Finance World, Summer 2013

A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 67 In the above graphs, the amounts due to the servicer and trustee, coupled with the accrued interest, are for the most part comprised of non-payment of P&I by the borrower that have been advanced to the trust by the master servicer, which are thus typically owed to the master servicer upon liquidation of the loan, as illustrated by the total P&I advance outstanding in the chart below. But they also include the taxes, insurance and other expenses that are delinquent and have been paid by the master servicer, in addition to the cumulative interest on those advances. Chart 27 Amounts Due Servicer and Trust Fee Chart 28 Accrued Interest For its part, the accrued interest expense category (broken out in the chart to the right) is comprised largely of the cumulative appraisal subordinate entitlement reduction (ASER) attributed to the loan. The ASER is the amount of delinquent interest payments that the servicer has deemed non-recoverable based on a new appraised value. It is relevant for the computation of timing and recovery of interest shortfalls to the bonds related to the delinquent payments, but it is otherwise no different from delinquent advances outstanding, in that it is created by the inability of the property to cover its debt service. The ASER informs the servicer as to how many dollars of the delinquent interest payment should be applied as an interest shortfall to the least senior bonds in the waterfall. The rest of the interest payment would be paid to the bonds by the servicer as an advance that is recoverable from future liquidation proceeds, which allows the servicer to maintain some level of liquidity in the bonds. The ‘Other’ designation in the Accrued Interest chart is not reported in the IRP, but mostly relates to two line items noted in the CREFC Realized Loss Template which are the ‘Deemed Non-Recoverable Interest or Advances (prior shortfall)’ and the ‘Deemed Non- Recoverable Interest or Advances (paid from trust principal)’ line items. These are also advance-related expenses which are incurred once a master servicer has determined that its advances will not be recovered (usually when the outstanding advances reach a certain threshold as a percent of the perceived value, sometimes 40-50%). The master servicer would immediately stop advancing on the loan and begin to recoup advances already made from the collection of interest and/or principal, which would contribute directly to loan level losses and/or interest shortfalls. All together, these categories could be said to be directly related to servicing advances, whether by missed P&I payment or delinquent taxes, insurance or other essential expenses. These advances make up the majority of all liquidation expenses (94% of all liquidation expenses and 22% of all realized losses). The charts below show the total values of the two most important components of liquidation expense in the CREFC IRP loss templates. The totals are of our sample set of loans that reported complete realized loss templates, which were 3,908 loans with issuance balances totaling $30 billion from vintages that ranged from 1996 to 2011. Anatomy of a Loss


CRE Finance World, Summer 2013
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