Dissecting the Distress: Special Servicers
WHEN A CMBS LOAN GOES INTO DEFAULT, THE STEPS
taken by the entity representing the investors are akin to a row
of falling dominoes; in this highly formulaic process, one
action will inexorably trigger the next.
But Adam Weissburg, a partner at Cox Castle & Nicholson,
was thrown off his stride when a lender for a transaction in which
he was representing the borrower had gone belly up. “Even
though the lender retained the service division, it was just a shell
because all of those people had already left,” says the Los
Angeles-based attorney. “We knew it would be kicked over to
special servicing, but we just didn’t know who to talk to or when
that would happen.”
The loan did ultimately move to special servicing, but the
delay caused more angst in an already stressful situation,
Weissburg says. From there, things normalized—at least as much
as any default scenario can in
commercial real estate. Yet it was
a telling event for the executive,
who until last September had
By Erika Morphy
been expecting the downturn to behave as ones in the past.
“The issues confronting borrowers and lenders now are
materially different than the last go around, starting with the
fact that the capital side has just as many issues as the borrowing
side,” he says. “This is a completely new paradigm emerging.”
That’s bad news for borrowers who are either in default or
believe they will soon be when they cannot find refinancing.
The workout process—either with a portfolio or bank lender or
a special servicer—was never pretty. But it was survivable and
straightforward for all parties involved.
This downturn, in so many ways, is different, and that
extends to the players controlling the default process. Property
valuations are in flux; with few investment sales, it’s difficult to
establish comps against which to evaluate a defaulting borrower’s proposal. At the same time, special servicers are finding
their own resources stretched as more loans go into default.
“The number of assets transferred into special servicing has
increased significantly,” says Michael Carp, a Dallas-based SVP
and managing director with Capmark. In 2007, for example, he
says that 94 third-party assets were transferred to Capmark’s
special servicing division. In 2008, that number was 240.
Through February of 2009, it was 38.
Also, not surprisingly, the tension that exists between the investor classes—the AAA and the B-piece buyers—is breaking out, in
some cases, into open warfare as the economy deteriorates.
Now another wild card has been introduced into the mix:
the Treasury’s Public-Private Investment Partnership program.
Much of the attention has been focused on the impact it will
have on lending and liquidity. But the PPIP will also impact the
legacy loans in default or going into default. Unfortunately, the
details of the management and servicing of loans held by PPIPs
have yet to be revealed—it’s just one of a number of key areas
that still needs clarification. Much depends on how successful
the program is, though it’s safe to say the majority of defaulting
loans will still be subject to the existing rules.
But even the existing rules are providing little guidance to special servicers and portfolio lenders struggling to salvage defaulting
loans. “I have talked to a lot of special servicers and servicers and
they are getting sensitive, if not downright panicked, about the
looming credit issues in the securitized world,” Weissburg says.
Right now, paper originated in 2002 is starting to come due.
Those loans were not underwritten at the height of the real estate
bubble, but certainly weren’t at the bottom of the market either,
he says. Many are below the now-conventional underwriting standards of 65% LTV. “Add to that dynamic the growing number of