'Doctored Defaults' Worry Commercial Realty Lenders.(speech by Larry Duggins to Mortgage)(Bankers Association conference)(Brief Article)

Some sophisticated borrowers are trying to see if they can get concessions from lenders in the current economic slowdown by doctoring defaults, according to a participant at the Mortgage Bankers Association's recent commercial and multifamily mortgage administration conference.

Speaking on a panel session about collateral review, Larry Duggins, president, ARCAP REIT, noted that he is "seeing a disproportionate number of test run delinquencies" wherein the borrower goes into default and talks to the special servicer to get preferential treatment from the lender.

This is more common among "sophisticated borrowers" than among the "run-of-the-mill borrowers," he finds.

Post 9/11, the biggest lesson ARCAP has learned is to lay emphasis on quality, Mr. Duggins said.

"Quality hospitality properties going into 9/11 did not default," he noted.

Mr. Duggins believes that the most important aspect of CMBS is the servicing function, which requires management of the flow of information and appropriate borrower management, rather than loan origination.

"Don't let your originator not give you the resources. You are the most important cog in this industry," he remarked.