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WSJ: ‘Special Servicers’ Getting Creative December 8, 2010

Posted by Sean Tufts in Articles, Blogs, Retail News.
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The Wall Street Journal published a good article discussing some of the changes that we are starting to see from the CMBS special servicers.  The number of loan sale and REO offerings we are seeing has risen dramatically in the second half of the year with dozens of new pools released in the 4th quarter alone.  We are anticipating this activity to continue increases into the first quarter as large lenders continue to report very healthy profits and sort out their problem assets.

(I)n 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…The creative approaches that are emerging could be good news for the multitude of buyers waiting at the sidelines of the commercial real-estate market hoping to see bargains. Up until now, there have been far fewer properties on the block than many investors were expecting when the recession hit.”

Bad debt is being handled in a variety of ways.  The actual selling of non-performing notes on individual assets is just starting to pick up speed and lenders are finally starting to foreclose on properties instead of simply extending terms.  The increase in velocity and creativity is welcome news for buyers and brokers that have been frustrated by the different objectives of special servicers.  If a special servicer is making a fee while they manage/service the debt but do not make anything from a sale, why would they cut off their income stream by selling an asset even if that is the best solution for the bond holder.  This has led to the mentality that servicers play a critical asset manager roll and will solve the problem by leasing vacant space in failed projects.  The truth is that most don’t have the resources or local market knowledge to accomplish that task successfully and they would be far better off by liquidating the asset sooner.

As we move into 2011, let’s hope the velocity continues to increase at similar levels to the last two quarters and we see more real “deals” occur.  The full WSJ article can be found here.

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