Special Servicing Volume Declines Again

Fitch Ratings, New York, reported the volume of commercial mortgage-backed securities loans and assets in special servicing declined nearly 10 percent between April and July to $9.8 billion.

Volume has fallen nearly 25 percent from one year ago, Fitch said.

Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, noted Fitch’s figure marks the first time since the 2008 financial crisis that special servicing balances dropped below $10 billion after peaking at $90 billion.

CMBS 1.0 loans and assets accounted for $5.7 billion or 58 percent of the total specially serviced loans/assets, down from 63 percent ($6.8 billion) in April and 75 percent ($9.6 billion) last July as special servicers continue to resolve legacy loans and assets, Fitch said. Nearly 20 percent of the outstanding CMBS 1.0 loans/assets–approximately $1 billion–transferred to special servicing in 2018 and 2019. Most were re-transfers and re-defaults of previously modified loans ($0.9 billion).

“Since the bulk of the balances are still in CMBS 1.0 deals, that figure will continue falling until we hit a bump in commercial real estate performance,” Olasov said.

In contrast, CMBS 2.0 special servicing volume remains low at $4.1 billion, just 1 percent of the outstanding 2.0 universe, Fitch said. But that figure is up 32 percent (from $3.1 billion) compared to a year ago. Fitch reported 40 percent of CMBS 2.0 specially serviced loans are still performing and approximately two-thirds entered special servicing for imminent monetary default reasons. “These loans are either still covering current debt service payments or the sponsor is coming out of pocket to fund shortfalls but further anticipated occupancy and/or cash flow declines will increase the likelihood of default,” the report said. The remaining one-third entered special servicing for imminent non-monetary default reasons such as technical defaults or borrower-related issues.

“The nature of the distressed loans from CMBS 2.0 are mostly what we refer to as ‘workout lite’ with slight losses to the trust in the form of unreimbursed modification fees,” Olasov said. He noted the default curves on CMBS 2.0 are superior to most pre-crisis vintages going back to the early 2000s.