You can view the .pdf version here.
You can view the .pdf version here.
This is a nice advertisement we are putting in the NY Real Estate Journal (to be published at the ICSC NY Show) alongside an article about CMBS note sales.
Trepp is an industry leader in providing CMBS and loan data /surveillance. Much of what CPS does on a daily basis goes hand in hand with on information provided by TreppLoan.
You can review the Client Spotlight here.
The white paper can be accessed at http://www.cwcapital.com/SpecialServicing/Pages/Default.aspx
Please be advised that CW Capital makes no endorsement of the services provided or methods utilized by Case Property Services.
Eliot Brown of the Wall Street Journal recently published a great article titled “Bad-Loan Revival Unburdens Banks” which articulated how the rising real estate values are allowing banks to dispose of REO assets without incurring much of a loss.
For the classic banking institution, there is no doubt that the rising values are a boon, but for CMBS Trusts beholden to complex rules, it serves more as a means to realize losses, and generate servicing fees- a forcing of their hand, if you will. To explain, I will need to run through a quick CMBS refresher course:
1. Advances: The CMBS structure allows for special servicers to lend money to CMBS trusts, as well as for the Trust to spend money on a loan or REO property (for specific purposes) so long as the investment can be recovered; this is based on the opinion of the servicer, which is formulated as a result of the due diligence it has conducted where the servicer lends money to the Trust (many times for the payment of interest to bondholders)
2. Borrower Negotiations: Many stories have been written regarding special servicers consistently denying borrowers’ proposals. For as long as I can remember, Morningstar’s CMBS Research Reports have included a comment similar to “A denial by special servicers of borrower requests for loan extensions, modifications or debt restructuring, or a decision by borrowers to surrender the collateral, are still legitimate concerns.” The primary reasons behind this have been largely driven by the lenders’ opinion that the proposal set forth by the borrower may represent a lower Net Present Value than the alternative (foreclosure and REO sale, or Note Sale). In essence, the lender felt that a sale of the asset would net a greater return.
3. CMBS Bond Stack: As previously explained via the infographic posted on this Blog, the most subordinate bond tranche in the CMBS structure — also known as a “B-Piece” — and has a first loss position. In return for its risk, it is granted the title of “Controlling Class,” and has the unilateral right to appoint the special servicer and dictate strategy. This tranche usually is owned by hedge funds and special servicing companies. The tranches above it, progressively rated higher and more secure, are usually each owned by more conservative investors than the one beneath it. Once the lowest tranche realizes losses in excess of a certain percent (let’s say 75%) the control is passed to the bond class directly above it. In today’s market, many of the legacy CMBS trusts are one or two tranches away from being controlled by pension funds or insurance companies- if they aren’t already.
Over the past few years, it was in the best interest of the controlling class (not necessarily the Trust as a whole) to do everything possible to defer losses and have the special servicer collect fees (which it would then share with the controlling class ownership). As it would not be collecting interest distributions, and principal recovery was at a best a pipe dream, in many cases special servicers focused primarily on its fee income as opposed to the interests of the trust as a whole. There, I said it.
Today, with rising values and practical bond ownership, special servicers/controlling classes can for the most part no longer collect fees while just promising a better day, especially while making advances. The numbers just don’t work and there is way too much uncertainty. The inflation in property values, forces the special servicer to recommend a sale.
The good news? When a servicer sells a loan or property, they make a significant fee- a golden parachute .
The bad news? With the reality of a defined exit price and losses realized, perhaps the distressed borrowers offer was in fact the best net present value to the trust!
Shlomo Chopp recently sat down with Samantha Rowan of Real Estate Finance Intelligence to discuss distressed commercial real estate loans.
I was recently asked “How much longer do you think we’ll be talking about distressed CMBS mortgages”? http://t.co/40y8u0bxlM
— Shlomo Chopp (@Shlomo_Case) August 9, 2013
I just published a unique perspective regarding how rising rates affect borrowers of distressed fixed rate mortgages. Access it here at the NY Real Estate Journal website.
Over the past few years Case Property Services has been continually asked about the CMBS foreclosure deal flow that seemed like it would never happen.
There are three primary reasons for this:
1. The main and most obvious explanation is experience. The parties involved have learned first-hand, as Kenny Rogers famously sang, “When to hold ‘em…. When to fold ‘em.”
2. In many instances, lower level bondholders have realized significant losses and been removed from control of the CMBS structure. The new controlling classes — many times the formerly senior bondholders (or those who acquired their position at a discount to par) — have now begun making decisions that are more in line with property-driven reality, and have realized that at times taking a loss today is as bad as taking a loss tomorrow. Even though deferring the loss affords the controlling class a lengthier control period, the fees generated from the longer control period do not “move the needle”, as compared to salvaging whatever is left or just “getting out of the position.”
3. As a Real Estate Mortgage Investment Conduit (REMIC), CMBS trusts are governed by a specific set of tax laws. One of these laws requires that under most circumstances, REMIC’s do not hold an REO property for more than three years. We are seeing more and more of these REO properties hit the market for sale.
To further underscore these points, we invite you to read an informative recently published article by Mark Heschmeyer of CoStar Group that relates to this matter: “Increasing REO Sales Driving CMBS Delinquency Rates Lower, More Large REO Sales on the Way.”