Into the Looking Glass (Day Three - part 2): 2009 MBA-CREF - CMBS Special (workout) Servicing Myths? Fact or Fiction
(This is part of a series of postings from the 2009 MBA-CREF convention in San Diego.) (Trends; Arriving; Day One; Day Two; Day Three)
My time at the convention has been a series of "firsts" for me:
- "live" blogging on Day Two during the Opening Session talk by Paul Begala of CNN and Tucker Carlson of MSNBC (thereby cementing, and forever embracing, my "inner geekness")
- after experiencing the credit crisis first hand in the EU last fall (Before; Day 1, Day 2, Day 3, Day 4 & Last Day), I completed the high-level credit crisis perspective by immersing myself in it here at the MBA-CREF conference - after years of drinking from the "frothy" side of the real estate finance cycle
- finally, this is the second blog entry for today - the last day of the convention. I've never done two of these in one day. (. . . need to find a hobby.)
But don't think that I've saved the "best" for last; because there is a "positive" side to the new economy. There is opportunity in chaos and change.
However, I am continually approached by people concerned about the inability of CMBS borrowers to locate financing to refinance their CMBS loan. Notwithstanding efforts by the CMSA and the MBA to educate the industry on this product (such as their brochure explaining CMBS debt), much confusion and misinformation exists about CMBS loans.
So, this last entry will focus on a session here at the convention that addressed the myths of CMBS servicing . . . . "click on" to read on . . . .
BIGGEST MYTHS OF CMBS SERVICING:
- The Tsunami is coming (on workouts) and nobody is ready. The panel said they were ready, and that they were reallocating staff to deal with it. Note that the head of a large special servicer told us (off-line) that each of his managers could handle 20 workouts at any single time. Humm. . . that's not my experience from the late '80s and early '90s. Each workout is a "hands on" process. As you can tell, I'm a HUGE techie; and my experience is that artificial intelligence is NOT quite there on this topic. Technology is all about fewer people doing more; a workout is all about one person doing less. Maybe I"m wrong, or simply not a techie. Or just old. And too old to argue it.
- The crisis is just like the one in the late '80s and early '90s. This one is a partial truth. Kind of . . . .
- Servicers represent the borrower. Answer: NO. Next . . .
- The only way to talk to the special servicer is to stop making payments on the loan. Answer: NO. Definitely not. Stupid move. Instead, prepare a package that literally re-underwrites the loan (and the project, the principal, etc.), and send it the servicer, with a clear articulation of the approaching or immanent default. But do NOT stop making payments. Bad things happen when payments are stopped. Bad things. (Hint: recourse events . . . .)
- At maturity, the loan will be extended. Answer: NO. The servicer will re-underwrite the loan. So, again, help the servicer out by furnishing all of the materials and information that you'd furnish if you were applying for a new loan. Show the servicer "why" it makes sense to extend, and give sound underwriting justifications. (See #4 above.)
- Servicers are only in it for the money. The panel said "no." Humm . . . just beware of extension fees. Remember, servicers are not non-profits. Hopefully the servicer's standard of care to the trust will mitigate raping the principal (on the extension fee) at the expense of the trust.
- 25 year old managers are working out $50mill loans. The panel said "no." I follow that position at this juncture in the market. However (see #1 above), the prediction here is that when number of defaults increase, this answer will change. Let me digress here: the entire supposition of our Tough Times blog is NOT that I need a hobby (although Barb [the patient saint who has stood by me - sometimes laughing - for 29+ years] says I do need a hobby), but that workout experience is NOT plentiful, and that companies need this blog to train their people. (See my early experience entry.) In addition, we're continually giving workout seminars for clients. So, please don't tell me that experience is not, nor will be, a problem. . . . or I'm simply wasting an opportunity to pick up a hobby.
- Advancing is good business for master servicers. NO. A master servicer is not a bank - and (to my knowledge) none of them have rec'd funds from TARP.
- Special servicers are only interested in protecting their investments (since they're "related" to the B-piece buyer). NO. Caveat: there is a growing under-current of tranche tension between the investor groups. This will be interesting to watch. And potentially harmful to the capital markets niche.
- Every appraisal creates an appraisal reduction (called an "ASER" in CMBS lingo). No. However, a new appraisal is required when a loan is transferred from master servicing to special servicing.
- When one loan transfers into special servicing, then the whole loan portfolio transfers. No. This is not the RTC where whole portfolios transfer. This is a one at a time process.
- The credit crunch (by itself) means an automatic loan term concessions. No. Each loan, property, market and borrower is reviewed. No "magic bullet" here. However, we're watching this one, and expect to see some really, really creative litigation. Yes, we're doing our own research - top prepare for the battle.
- CMBS is the same as RMBS. No.
- The only option a special servicer has to resolving a defaulted loan is to foreclose. No. Generally, a special servicer can take the same actions as a servicer\holder of a portfolio loan, with several exceptions (exceptions include: purchase options in the PSA; can not take a profits interest; cannot give new money; etc.)
- The rating agencies approve all workouts. Not really; however, they might issue a "no down grade" letter.
- You can't get any information on CMBS loans. No. There are many web sites that furnish information CMBS loans.
- The trustee acts like a policeman in the structure. No. It merely has administrative functions. It has no surveillance role.
- The special servicer can not modify loans unless there exists a payment default. No. The comment was made that 50% of special serviced loans are NOT in payment default. See #4 above.
- All special servicers own the B-piece and are the controlling class holder. Generally yes, but not always.
If you have any questions or comments, please post your comment.
