Special servicers for the commercial mortgage-backed securities industry are preparing for an increase in delinquencies, the first time the mart will have had to handle the phenomenon, according to Real Estate Finance & Investment, a BW sister publication. Investors have expressed concern about special servicers' readiness to handle the increase, but preparations have included the addition of seasoned workout staff, upgrades in technology and a practice of monitoring the performance of a loan during its life. "The market is seeing an increase in delinquencies," reflects Stephanie Petosa, a senior director at Fitch. "Servicers are describing their operations as prepared for an increase and we are attempting to verify that through reviews."
According to research from Standard & Poor's, commercial loan delinquencies--which have floated around historical lows of 0.30%-0.50% for the past several years--could reach 1.5%-2.0% year-end and 2-2.5% by the end of 2002. This would lead to a period of heightened activity for special servicers, which work out the troubled loans in CMBS deals. "We would be foolish not to assume [that delinquencies] will rise further," says Brian Hanson, senior v.p. at CRIIMI MAE, a Rockville, Md., non-investment-grade buyer and special servicer. "We've been expecting that since day one."
Maintaining an adequate staff is one of the most important factors that Fitch looks at when rating special servicers, a function it has performed since 1992. This is a question that has investors concerned, says Michael Hoeh, v.p. and portfolio manager at Dreyfus. Because delinquencies have been so low, most special servicers are operating with a skeleton crew and have been warehousing their workout specialists in other parts of the business, Petosa says. "There is not a lot of staff to workouts right now. We want to find out how many people are ultimately accessible to do special servicing," she adds.
Because delinquencies have been low, special servicers have been working to enhance their technology. This includes using technology to track defaulted assets through their workout or foreclosure process and complete net-present-value calculations, Petosa says, Petosa says. Although delinquencies have been low, certain sectors were cited by all servicers as troublesome, namely limited service hotels and retail. But apart from that, the market has not been seeing any clear trends in delinquencies.
Servicers also are doing a better job of being proactive, Petosa believes. This includes communicating with the master servicer on a 30-day basis to determine which loans are performing well and which are likely to cause alarm down the line. First Union Securities has been tackling the issue by analyzing trends, Commercial Mortgage Securities Association watch lists and any red flags from geographic and property types, said Dennis McCloskey, director of special servicing. In addition to its own preparations, First Union's special servicing group is able to tap into First Union National Bank's Special Asset Management Group, which will increase the amount of staff that it can turn to delinquencies.
CRIIMI's initiatives include a proprietary database launched about two years ago that includes detail operational data and property information. "This gives us the ability to do data mining and analysis on specific pools so that we can be proactive in viewing the risks," Hanson says. CRIIMI has added some staff to its special servicing group and expects to add more in the coming months. And like some its peers, CRIIMI typically has bargained for the surveillance duties for a pool of loans. This has allowed it to be included in the on-going surveillance of the loans, including approving borrower consent requests. "We've approved modifications, secondary financing, mezzanine debt. If you're a B-piece buyer, you need to have a hand in every situation."