The shorter the time a loan is in special servicing, the higher the recovery rate, according to a new analysis from Moody's Investors Service.
The rating agency’s third quarter surveillance review of U.S. commercial mortgage backed securities and commercial real estate collateralized debt obligations, released today, examines recovery rates in outstanding CMBS transactions for each of the largest special servicers, dissecting the data by strategy, securitization vintage, property type, year of liquidation and months to recovery.
“For the first time, Moody’s can conduct this type of analysis,” said Michael Gerdes, managing director and head of Moody's US CMBS & CRE CDO surveillance. “Beforehand, the quality and quantity of data available for the CMBS industry was insufficient for drawing conclusions about the relative performance of special servicers.”
Moody’s analyzed recovery rates for 7,558 resolved loans with an outstanding balance of $60.5 billion. The average recovery rate was 58.5%; average number of months to recovery was 14. Recoveries for loans taking six or less months to resolve were 81.0% compared with a 45.9% recovery rate for loans resolved during their second year in special servicing.
“Overall, the data indicate that losses generally increase with the amount of time spent in special servicing, and that larger servicers resolved significantly more loans than smaller servicers,” said Gerdes.
Additionally, the use of a real estate owned (bank repossession) strategy by special servicers added costs and increased the time to resolution. The use of an REO strategy added, on average, 10 months to the time to resolution, and assets disposed of with a REO strategy posted an average recovery rate of 40% versus 65% for non-REO assets.
Berkadia and LNR achieved the highest recovery rates on disposed loans that incurred a loss; 67.6% for Berkadia and 62.5% for LNR. C-III and CWCapital achieved similar results on a significant base of resolved loans; C- III posted an aggregate loan recovery rate of 54.5%; CWCapital, 54.4%.
Moody’s noted that the location of the asset influenced recovery rates with loans in judicial states recovering 57.9%, while loans in non-judicial states recovered 61.7%. In locations with both types of foreclosures, the added complexity reduced recovery rates to 49.8%.