Special servicers of CMBS conduit loans are increasingly considering discounted pay-offs as a solution to problem CMBS conduit loans. “CMBS loan disposition and modification decisions for CMBS conduit loans have historically been in the hands of special servicers,” explained Michael Sneden, Executive Vice President of ValueXpress. “A special servicer is assigned to each CMBS issue, usually based on the fact that the special servicer either directly or indirectly invested in the first loss position in the CMBS issue in which it is special servicer,” said Sneden. “Once the loan becomes troubled (normally after 60 days of delinquency), the loan is transferred from the master servicer to the special servicer for workout.” Workout options are governed by a “Pooling and Servicing Agreement,” which is a very lengthy document that basically says the workout strategy must “maximize the net recovery to the trust that contains the pool of loans” (i.e., the particular CMBS issue in which the troubled loan is a part).
When property values were increasing, workout strategies leaned heavily toward foreclosure and property sale. Until 2007, net recoveries were relatively high, often 80%-100% of the unpaid principal balance of the loan. Beginning in 2008, net recoveries began to decrease as property values declined and financing disappeared. Now, net recoveries are falling dramatically. In its December 2009 CMBS Monitor, JPMorgan calculates that $370 million of CMBS conduit loans were liquidated in December 2009 with an average net recovery of 48% of unpaid principal balance of the loan.
ValueXpress is utilizing the FHA/HUD 223(f) multifamily loan refinance program to help its clients retire maturing CMBS conduit loans. The FHA/HUD 223(f) multifamily loan program is favored because it generates more loan proceeds that alternative multifamily loan programs. “Even then, sometimes we end up short on loan proceeds,” observed Jim Brett, a ValueXpress underwriter. “When that occurs, we have been successful in presenting the proposal to the special servicer and having it accept a discounted pay-off at, say, 70%-80% of the unpaid balance, as that amount maximizes the return to the loan pool versus the 50% recovery being obtained through other workout strategies.”