CMBS special servicers have increased their activity over the past two months with roughly $3.7 billion in newly-modified loans, according to an FTN Financial report.

The three most often used modification techniques by the "big three” special servicers (LNR Partners, C-III Asset Management, and CWCapital Asset Management) include term extension, extension of interest-only period and the creation of a hope note.  

According to the report, some form of term extension (including workouts where term extension is combined with another modification alternative) has been the most popular modification technique on a consistent basis. This is followed by an increase to the IO period.

On the other hand, the use of the once-more-preferred modification method of changing the interest rate has trended downward in the last two months. The analysts also noted that the use of hope notes, which in early 2010 was an option that was rarely used, has been trending upward since early 2010.

In a CMBS structure, the current cashflow of a property covers the debt service on the A note. The B note becomes the “hope note” and typically doesn’t receive interest payments during the term. The hope is that at loan maturity there will be sufficient proceeds available to payoff Note A and paydown Note B.

"The three most frequently used modification methods – term extension, extension of IO period, creation of hope note – by the largest special servicers all have the effect of extending the average life of front pay CMBS tranches either by delaying the scheduled return of principal or by delaying (and perhaps reducing) the return of recovered principal in the case of the hope note," FTN analysts stated.

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