CMBS Debt Relief Requests Slow, Special Servicing Transfers Climb

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Commercial mortgage-backed securities (CMBS) borrower relief requests declined for the first time in the last month and half since COVID-19 gained a foothold on commercial property markets, according to recent data compiled and released by Fitch Ratings

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But the news isn’t as comforting as it may initially seem, with Fitch senior director Adam Fox warning the dip is likely the “calm before the storm, as higher delinquencies and more relief requests come in May.” 

In the two weeks ending on April 26, the previously unprecedented wave of thousands of debt relief requests from borrowers seeking assistance from their respective loan servicers due to issues caused by the pandemic that has materialized over the last month and a half has declined for the first time since it began. 

During those two weeks, servicers received another 1,301 inquiries from borrowers, which amounted to roughly $48.5 billion in CMBS debt; that included 43 single-asset single-borrower (SASB) deals. The figure is down compared to the previous number of 2,824 requests, totaling $51.5 billion, that came through in the two weeks that ended on April 12, according to Fitch. 

Nevertheless, special servicing transfers have nearly doubled, a sign that master servicers — who were essentially the first lines of defense against the monsoon of inquiries — are progressing through requests that include loans in need of modifications or a restructuring from special servicers; it’s also one of the first signs of the severe toll the pandemic has had on CMBS borrowers and their collateral. 

CMBS master servicers don’t have the capability or the authority to make any granular changes to loans that are in question, rather assessing the borrowers situation and the state of the underlying collateral and handling administrative duties to determine if the loan needs to be sent to the special servicer, who then begins the workout or modification processes, as needed. 

Special servicing transfers totaled $8.4 billion in CMBS debt across 218 loans during the two weeks that ended on April 26, which was a jump from the 113 loans totaling $5.7 billion that were transferred in the previous two weeks, as per Fitch data. Not all special servicing transfers were due to default since many special servicers “are working with borrowers on a non-transfer or borrower consent basis. Nevertheless, Fitch expects special servicing transfers to increase as loan defaults increase and more complex modifications are needed,” the firm wrote. 

Fitch has been fetching inbound coronavirus-related relief request data from Wells Fargo, Midland Loan Services, KeyBank and Berkadia Commercial Mortgage, the industry’s four largest CMBS master servicers. 

Since mid-March, when Fitch began collecting this data, nearly 7,000 CMBS borrowers, totaling more than $149 billion in outstanding debt (around 26 percent of the entire sector) have inquired to their servicers about potential relief. And while it seems servicers are steadily making progress, the increase in special servicing transfers sheds light on what May will have in store for the sector.

The firm said the recent slowdown in requests is due to “month-end timing and final April rent collections and debt service payments.” April rent collections surpassed many expectations, so Fitch believes relief requests will rise yet again this month with an expected jolt in May delinquencies.

And that storm is already materializing. According to research firm Trepp, April U.S. CMBS delinquencies jumped by 22 basis points from the prior month to 2.29 percent, the biggest leap in almost three years. According to Trepp, delinquencies haven’t seen a jump like this since June 2017, “when the industry was still talking about the ‘wave of maturing’ 2007 loans,” as per the firm’s April report.

Borrowers have been reaching out to their master servicers to inquire about things like payment forbearance, loan or covenant modifications, general payment issues, the reallocation of reserves and also leasing modifications, according to Fitch. The ratings agency is looking ahead to May’s reporting cycle to quantify the frequency of forbearances or modifications that are being granted.