Securitizing commercial real estate financing into CMBS was a trend that hit a peak before the economic downturn of 2008. Defaulting on financing that underlies instruments from which shares were sold to investors calls for the use of “special servicers” – management companies who, upon the event of a default of a given loan, represent the interests of those clients who own pieces of the troubled commercial mortgage-backed security. These companies are, in much the same way as banks in similar situations, under great pressure to avoid foreclosures. These specialists in dealing with defaulted mortgagel oans have been leading the way in creative methods to do just that.
The burst of creativity is timely. A recent Wall Street Journal piece by Anton Troianofsky and Eliot Brown spells out that the workload for special services has jumped as the total of CMBS defaults have risen – around 16% over 2009 year-end numbers.
The firms, known as special servicers, are dealing with an influx of souring loans backed by commercial-mortgage-backed securities, or CMBS: a total of $90.9 billion as of the end of September, compared with $73.8 billion at the end of last year, according to credit-rating firm Fitch Ratings. But the pace at which those loans have been resolved has picked up at an even faster rate, with $27.9 billion recovered by special servicers from bad loans in the third quarter, compared with $8.9 billion in the first quarter, according to Fitch.
Many of those bad loans are simply getting modified and extended, pushing the borrower’s day of reckoning to a day into the future when, both sides hope, the market will improve to a point at which the property owner can refinance. But in other cases, servicers are trying more unusual methods to dispose of properties through sales or other means as they work through a volume of distressed loans that is testing the legal apparatus built up by Wall Street’s boom-time securitization binge.