A B-piece buyer’s appetite for taking on 5% risk and the buyer’s future affiliation with special servicing will depend on a final risk-retention rule required under the Dodd-Frank Act. The comment period on the banking agencies’ risk-retention proposal ends June 10.
According to Brian Hanson, managing director at the Bethesda, MD, office of CWCapital, at the recent Mortgage Bankers Association’s Commercial/Multifamily Servicing and Technology Conference, under Dodd-Frank, an operating adviser, or a trust or senior adviser would have surveillance of special servicer activities and could affect a B-piece buyer’s decision to add capital into a deal.
“There[in] lies the rub because if the B-piece buyer takes on risk, the operating adviser gives an annual review of the special servicer,” Hanson said. “If the B-piece buyer invests money and is not eliminated as a special servicer, and the operating adviser said the special servicer is not adhering to the deal or trust, [the operating adviser] can recommend [special servicer] removal, which is also not appetizing. Organizations want to clarify the language, and how that plays out will determine whether B-piece or special servicing holders will be in the market.”
“The master servicer may also have to consult with an operating adviser; after a control event occurs, the special servicer would consult with them on resolutions. If the operating adviser believes the special servicer should be replaced, they would receive a vote from bondholders,” said Greg Winchester, managing director at TriMont Real Estate Advisors Inc., Atlanta, GA.
However, whether operating advisers are special servicers or another industry group plays that role is still vague. Winchester said a special servicer would play the best role of operating advisor because special servicers have skilled staff and real estate experts in place with “a quick and speedy” approach, and they understand Pooling and Servicing Agreements. “This is what drives the market to the large extent and capital from the B-piece market is key,” Winchester said.
Since the CMBS market revamped last year, now CMBS 2.0, underwriting started out conservatively, which has some industry participants concerned. Hanson said first loans made after a recession are typically solid loans, and compared to aggressively underwritten vintage loans from 2006 to 2008, “it would hard to not be better as a group. If you look at any special servicers, the defaults are primarily seen on those vintage deals,” he said.
However, Hanson said weighed against more conservative underwriting and past experience are nearly 23 to 25 new conduit lenders. “There is a lot of competition for loans and, with that, comes risk and the possibility of more aggressive underwriting,” he said.
After losing a recent bid on a pool, Hanson said that as a B-piece buyer, CWCapital would have wanted some of the loans taken out of that pool — under an “unwritten rule” that it could negotiate with an issuer. He said the weak loans were a reflection of some markets still in trouble and problems with loan sponsorship. “We are definitely aware that there is a new crop of B-piece buyers,” Hanson said. “Who is in the market and how long they are in will depend on many things, including risk retention.”