Finance  ·  CMBS

Seven Percent of CMBS World Hit Special Servicing in First Half of 2020

More than $40 billion, across 1,065 CMBS loans, were transferred to special servicing


Around 7 percent of the commercial mortgage-backed securities (CMBS) sphere was transferred to special servicing in the first half of this year as the country and the commercial real estate finance sector wrestled with life under the weight of COVID-19, according to a Fitch Ratings analysis of Trepp CMBS monthly special servicing data. 

The first half of this year saw 1,065 loans, or just over $40 billion in outstanding CMBS debt, transferred to special servicers, who are next in line following master servicers and are responsible for handling workouts or loan modifications and default scenarios. (This excludes agency, single-family and small balance loans.)

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Around $39.4 billion of the total, across 1,031 loans, has transferred since March, and over 900 loans — representing $35.5 billion — were passed through in the second quarter alone, as per Fitch, which indicated that over half of these loans (62 percent by loan count and 53 percent by balance) have fallen more than 30-days delinquent, overwhelming special servicing operations and pressuring master servicers to advance funds. 

This tsunami of transfers stands in stark contrast to the mere 674 CMBS loans, totaling $9.1 billion, that special servicers had their hands on at the end of last year as “asset-to-asset manager ratios declined due to resolutions outpacing new defaults,” according to Fitch. 

Fitch wrote that because of these new delinquency figures, CMBS loan advances from the industry’s four largest master servicers — Wells Fargo (WFC), Midland Loan Services, Keybank (KEY) and Berkadia — climbed to around $1.5 billion by the end of July, as per Fitch’s analysis.

“While a material increase, advances remain low relative to the collective peak of $4 billion during the last recession, because delinquencies remain below the 2011 peak and loans have been delinquent for a comparatively shorter period,” Fitch analysts wrote. Because of this, the firm “expects advances will continue to increase as special servicers grant longer debt-relief periods and additional loans become delinquent through [the third quarter].”

Fitch noted that servicers have reallocated staff to handle the transfer influx and to help with the flow of borrower relief requests on performing loans, but at the same time, the ratings agency hasn’t observed any material moves to increase staff — and the hiring that has taken place has been selective.

In April, Stacey Berger, the executive vice president of Midland Loan Services — a division of PNC Real Estate and one of the top two master and special servicers in existence today — told Commercial Observer that going into 2020, his firm began essentially bulking up and undergoing internal stress tests to effectively gauge their ability to handle an influx should a downturn finally wipe out the more than 10-year up market in CRE. He said they had undergone tests and prepared for a 2008-like scenario, with a drawn out 24- to 36-month timeline; he, and no one else, expected what would come over the span of just several weeks. 

By the end of the second quarter, there were just over 1,400 loans and $40 billion worth of outstanding debt in special servicing — 249 loans worth $4.6 billion had been secured by REO assets (real estate owned assets, or property owned by a financier after a failed sale via a foreclosure auction), as per Fitch data.

Borrower relief requests are of course still incoming, with “common” forms of relief action coming in the form of reallocating reserves to cover debt service, forbearance on principal, interest or reserve payments, the instillation of interest-only periods as well as shifts in “waterfall structures for cash-managed loans,” according to Fitch research, which also highlighted its expectation of a further rise in extensions for maturing loans, mostly on retail and hospitality assets due to refinancing challenges. Year to date at the end of June, 50 nonperforming matured loans —  $4.1 billion in debt — had been moved to special servicing, according to the firm’s analysis.

Unsurprisingly, more than half — 54 percent — of loans transferred to special servicing in the first half of this year were on hotel assets, while retail accounted for 32 percent and all other property types made up just 5 percent or less of these transfers, per Fitch. And the largest volume of transfers occurred on properties located in top primary markets such as the New York, Houston, Chicago, Los Angeles and Dallas metro areas.