Posted on February 11, 2009 by Keith H. Mullen

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:

  1. 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.
  2. The crisis is just like the one in the late '80s and early '90s.  This one is a partial truth.  Kind of . . . .
  3. Servicers represent the borrower.  Answer: NO. Next . . .
  4. 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 . . . .)
  5. 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.)
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. CMBS is the same as RMBS.  No.
  14. 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.)
  15. The rating agencies approve all workouts.  Not really; however, they might issue a "no down grade" letter.
  16. You can't get any information on CMBS loans.  No.  There are many web sites that furnish information CMBS loans.
  17. The trustee acts like a policeman in the structure.  No.  It merely has administrative functions.  It has no surveillance role.
  18. 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.
  19. 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.

 
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Posted on January 26, 2009 by Keith H. Mullen

Key Differences Between CMBS Loans and Portfolio Loans in the Loan Default Scenario (Part 2)

Guest Writer – Christopher T. Nixon, Winstead PC
(2nd in a series of 2 postings)

In my prior posting (Part 1),   I covered some of the key differences between a workout of a CMBS loan and a workout of a portfolio loan.

Here are some more:

  • Flexibility.  Due to REMIC rules and the restrictions and limitations set forth in the PSA, a Special Servicer is not able, or has less flexibility than a portfolio lender, to substitute collateral, take additional collateral, capitalize past due interest, bifurcate the debt, take an equity or contingent interest position, operate an REO property, or lend additional money as a loan default solution.
  • No CMBS Loan Dragnet Clause.  The borrower has no other source of repayment for a Special Servicer to consider in the workout of a CMBS loan, which may not be the case in a portfolio loan workout scenario.
  • SPE Provisions.  A CMBS loan borrower is bound by bankruptcy-remote SPE provisions in its organizational documents.

a.) Bankruptcy Remote.  There are structural impediments to the borrower's ability to file bankruptcy. Even if the borrower files bankruptcy, the CMBS lender is likely the only secured creditor.
b.) Single Purpose.  The borrower has no ability to substitute or add collateral to address a CMBS loan default.

  • Carve-out Guaranty.  While many portfolio loans are recourse loans, CMBS loans are typically non-recourse. With respect to a CMBS loan, the borrower and the principals of the borrower may face recourse liability for certain bad acts described in the loan documents.
  • Cash Management.  Many CMBS loans have a lockbox cash management component, which facilitates the control of cash collateral. Portfolio loans typically do not have any such component.
  • Regular Borrower Financial Reporting.  While portfolio loans typically do not have rigid borrower financial reporting requirements, regular borrower financial reporting requirements of a CMBS loan keeps the Servicer apprised of the financial status of the real estate collateral. The information in such financial reports may be critical to a Special Servicer in making an informed decision about how to address a loan default.
  • Property Management Control.  CMBS loans typically assign to the lender the right to replace the property manager with a lender-approved property manager. Portfolio loans typically do not have any such assignment provision.


The differences between the two types of loans are significant. And this list is not all-inclusive. So, be careful – and as self servicing as this sounds, use legal counsel who is experienced in handling CMBS loan workouts.

If you have any questions or  suggestions, please post a comment.
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Posted on January 22, 2009 by Keith H. Mullen

Key Differences Between CMBS Loans and Portfolio Loans in the Loan Default Scenario (Part 1)

Guest Writer – Christopher T. Nixon, Winstead PC
(1st in a series of 2 postings)

In the commercial loan default scenario, CMBS Special Servicers are not able to provide to borrowers many of the accommodations that may be provided to borrowers by portfolio lenders. CMBS Special Servicers are subject to many more restrictions and limitations than to which portfolio lenders are subject in a loan default situation.

Understanding the key differences between CMBS loan workouts and portfolio loan workouts will facilitate a borrower's efforts in attempting to address a CMBS loan default with a Special Servicer. Some of the key differences between CMBS loan workouts and portfolio loan workouts are as follows:

  • Standards. A portfolio lender applies its own individualized standards in addressing a loan default; and a third-party servicer will administer the loan in accordance with the servicing standard articulated in its servicing agreement with the lender. A CMBS Special Servicer must administer the loans in accordance with the Servicing Standard set forth in the applicable Pooling and Servicing Agreement (the "PSA") and comply with REMIC rules to protect the federal income tax-free status of the REMIC Trust in which the CMBS loan is pooled.
  • Continuity of Relationship. A portfolio loan has continuity in the origination, servicing, and workout of the loan. The portfolio lender has an ongoing relationship with the borrower and retains tight control over any third-party loan servicer. On the other hand, a CMBS loan involves the fragmenting of the obligations, responsibilities, and liabilities for the loan between multiple parties involved.
  • Workout Goals. A portfolio lender attempts to preserve the value of the asset and, in some instances, its relationship with the borrower. A CMBS Special Servicer attempts to preserve the integrity of the Trust, while maximizing recovery for the bondholders.
  • Preemptive Abilities. A portfolio lender may make additional loan advances or enter into preemptive loan modifications to address a potential loan default. A Master Servicer typically lacks the ability to preemptively address a potential loan default.
  • Due Diligence Review. A CMBS Special Servicer's review of due diligence may be more challenging than that of a portfolio lender because the Special Servicer is often not familiar with the loan before the transfer of the loan from the Master Servicer to the Special Servicer (i.e., the "Servicing Transfer Event").


My next posting will list several other differences.  If you have any questions or suggestions, please post a comment.
 

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