Commercial Servicer: Recovery May Take Hold Slowly for Commercial Real Estate Sector.(commercial mortgage backed securities)(Brief Article)

Mortgage delinquencies have been in the news in the last year, with the economy in recession. And with the real estate sector likely to benefit only on a lagging basis from any nascent recovery, it looks as though the situation might not let up for a while. Does a recent increase in the number of CMBS loans that have been transferred to special servicing but remain current augur an increase in delinquencies down the road? Standard & Poor's is investigating the situation.

An S&P study of several major servicers found that specially serviced but current loans outweigh delinquent loans by a margin of seven to four. The surveyed group had a total volume of serviced loans of $150 billion, with about 1.5% of the loans at special servicing. Of the loans transferred in during the year ended December 2001, there were approximately $2.24 billion of specially serviced loans, of which $1.4 billion were current and $840 million delinquent. According to one survey respondent, while five to 10 loans on average were transferred to special servicing before Sept. 11, the figure rose to 25 to 30 loans transferred monthly thereafter. Retail and lodging properties are prominent in the loans transferred post-Sept. 11 that are specially serviced but current. And New York and California are two states with a large share of these post-Sept. 11 specially serviced current loans, due to a high concentration of urban hotel properties, S&P believes.

A pooling and servicing agreement generally defines the circumstances under which a loan is transferred to special servicing. One situation is that in which a servicer determines that a payment or other material default is imminent and not likely to be cured within 60 days. In this case, "the servicer determines in good faith and reasonable judgment, based on discussions with the borrower, that an imminent default of a monthly payment is likely to occur and remain unremedied." Many times, a borrower will threaten a default under the loan agreement, hoping for a transfer to special servicing, since a special servicer has more authority than the servicer to modify a troubled loan, according to S&P. At this point, "the servicer is forced to determine whether the warning constitutes a transferable event or a ploy by the borrower to gain an extraction from its contractual liabilities in the current environment."