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CRE Finance World, Summer 2014

A publication of Summer issue 2014 sponsored by CRE Finance World Summer 2014 45 Chart 3 Delinquency Migration Illustration (Source: DBRS CMBS Advisor and CMBS.com) Rationalization of Workout Strategy Inclusions While common practice is quite justified in its treatment of IRP loans status, the practice of including just REO and foreclosure loans in a delinquency statistic is much less supported by the empirical experience of CMBS. Analyzing loss frequency and loss severities provides a better understanding of which strategies should be appropriately included in a delinquency statistic6. The charts below depict the frequency of significant loss and severity of loss for the final7 workout strategy of paid down CMBS loans. Chart 4 Significant Loss Frequency Given Final Workout Strategy (Source: DBRS CMBS Advisor and CMBS.com) As illustrated, note sale, DPO and deed in lieu of foreclosure show extremely elevated loss frequencies and loss severities, on average even higher than the commonly included foreclosure workout strategy. Loans flagged as deed in lieu of foreclosure often find their way into the foreclosure category of commonly cited delinquency statistics, but note sale and DPO often do not. Chart 5 Significant Loss Severity Given Final Workout Strategy (Source: DBRS CMBS Advisor and CMBS.com) Other or TBD also features an elevated loss frequency and somewhat elevated loss severities. As such, and given its more ambiguous nature and the fact that is so often used, it would be more prudent to recognize that strategy’s importance. The prevalent use of the other or TBD designation for workout strategy in the IRP is problematic for reporting transparency. On some occasions, this workout strategy is used throughout the life of a specially serviced loan, with the real workout strategy being withheld. Loans typically migrate from one workout strategy to another throughout their time in special servicing. The maximum number of migrations observed in the data is 26 and the average is four. However, for loans with high migration counts, workout strategies often switched back and forth between the same two strategies throughout the servicing process. On average, loss statistics did not change greatly as a loan migrated. In other words, loans did not frequently migrate from less benign workout strategies (reps & warranties, extension, full payoff, bankruptcy, modification) to more severe ones (REO, deed in lieu, note sale, foreclosure, DPO). Delinquency Reporting in CMBS


CRE Finance World, Summer 2014
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