In a report released Friday, Fitch Ratings stated that special servicers rarely exercise the fair value market purchase option or FVMO.

A survey that the rating agency conducted demonstrated that starting in 2001, the FVMO was exercised in CMBS offerings merely 11 times. In nine of these cases, it was used by an affiliate or interested party, Fitch stated.

Fitch analysts predict that these occurences will remain rare as the execution is complicated. Additionally, exercising the option gives a negative market perception for special servicers.

The rating agency thinks that of the conflicts of interest in terms of the special servicer role, the FVMO becomes of very low priority, they stated in a report about the survey. 

The firm's survey had nine active special servicers participating. It covered information starting in April 2001.

Fitch had started the survey because investors and other market players are still concerned about conflicts of interest created by special servicer affiliates.

These conflicts were made bigger when many larger commercial real estate firms bought special servicers. This then resulted in concerns that those companies were purchasing access to servicer-held real estate, the rating agency explained.

The information Fitch collected included whether the options were done on the servicers' own behalf. This is assigned to an affiliate or "interested party," or if the controlling class holder had used the option, Fitch said.

Analysts said that the execution's complexity and negative market view have limited how often these events happen. Pooling and servicing agreements require a fair market determination or FMD on all defaulted mortgages, they stated.

However, that does not mean that the option will be exercised. Once option holders are notified of a defaulted loan, which is one that is over 60 days delinquent on payment, they typically have between 60 and 90 days to execute or assign their option to buy, Fitch stated.

If an option holder is an "interested party" and desires to buy the loan, then the FMD must be made by a party aside from the special servicer. The process is usually conducted by the master servicer with the trustee confirming the FMD, according to Fitch.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.