May 10, 2010
By Stacey Mieyal Higgins
 

LOS ANGELES — The volume and complexity of the commercial mortgage-backed securities distressed assets was a hot topic last week at Jeffer Mangels Butler & Marmaro’s Meet the Money conference—and the problems are only just beginning to be understood.

There are a record in number of CMBS assets in special servicing in the U.S., according to Kevin Donahue, senior VP of special servicing at Midland Loan Services, who gave a general session CMBS update.

CMBS market

There is probably more that US$80 billion in special servicing as of April, Donahue said. About 70 percent is represented by 2005 -2007 issuance.

The hotel segment represents 20 percent. It’s the only segment of assets that is disproportionate because hotels make up only 10 percent of overall CMBS, according to Donahue. “That trend is expected to continue,” he said.

The pace of transfers during 2010 has slowed slightly, although it’s relatively consistent. The volume 16 months ago compared to now is a 700-percent increase of total number of assets in special servicing, according to Donahue.

Special servicers are at or close to capacity—there are more than 4,000 assets in special servicing, he said. “It doesn’t have to be specifically in monetary default; it’s also imminent defaults.”

The problem in CMBS is the inherent conflict of interest in the structure, Donahue said. “Bonds are changing hands in secondary markets on a regular basis. … But I think this is helping the industry; it allows it to take a step back and look at structures to see what works, what hasn’t worked.”

In the age of “CMBS 2.0” there have been deals done, including some single borrower deals, Donahue said.

“There are some signs of market thawing,” he said. “Even though we expect defaults to continue through 2011, partly due to maturities, there is a bit of a light of end of tunnel in terms of new product. In the second half of this year we’ll see new product, an appetite from investor side and hopefully it will be better written, better structured and better performing.”

Borrowers, investors and service providers equally are interested in the topic, as evidenced by the audience of a CMBS breakout panel at JMBM’S Meet the Money conference. Here are some points of interest for each group:

Loan servicing

• As a borrower, you can’t talk to the special servicer unless you’re in default. You can only talk to the master servicer, according to Ann Hambly, CEO & president, 1st Service Solutions.
• The Pooling and Service Agreement dictates modifications that are allowable.
• It’s a good idea to talk to a preemptive service that can help you understand your options, said Bob Massey, VP of asset management for TriMont Real Estate Advisors. You should bring your own plan of resolution to the servicer.
• The special servicer is looking for a clear and concise plan, said Curtis Spaugh, senior VP, asset management for Helios AMC Management.

Asset sales, timing

• “We haven’t gotten into the sell part of the cycle,” said Steve Van, panel moderator and president and CEO of Prism Hotels & Resorts.
• “A triggering event will require an appraisal,” said Jackie Brome, senior VP, director, of Berkadia Commercial Mortgage LLC. “We rely on three value points—the appraisal, the review and two brokers opinions of value. … We rely on all three to formulate value. Appraisal in this market is backward looking, at historical value points. You have to rely on actual sales, so we rely equally on BOV.”
• The trophy and near-trophy assets will be thrown out onto the market first and will generate lots of interest in the rest of 2010, Spaugh said.
• “It’s very early in the cycle,” Hambly said. There are a lot of modifications to try to work things out. It’s just getting started—laws are still getting pushed through.