The balance of specially serviced CMBS loans posted its eighth consecutive monthly decrease in November, but analysts at Deutsche Bank said in their 2013 CMBS outlook report that loans are not being modified or liquidated like they used to be.
CMBS loans are transferred to special servicing upon default or perceived imminent default, as the master servicer or special servicer determines. The total specially serviced balance (including performing and nonperforming transferred assets) has declined by $2.4 billion to $62.4 billion in Nov., and is now $18.4 billion lower than its peak, reached in May 2011, according to Citigroup’s Dec.5, securitization report.
Analysts at Citigroup said in the report that they expect servicers will continue to aggressively work down these loans for the next couple of years, as they prepare for an anticipated influx of loans starting in 2015 with the 2005-vintage ten-year balloon maturities.
Two notable large liquidations that took place in the last quarter are the Westin O’Hare Loan, a hotel in Chicago, Illinois and the Highland Mall loan, a regional mall in Austin, Texas.
According to a Moody’s Investors Service Dec. 5, report, the Westin O’Hare Loan is now the fifth largest liquidated loan to date. The loan was securitized in MSC 2006-IQ12 as two pari-passu A-Notes with a total outstanding balance of $101.0 million. The Highland Mall is now the seventh largest liquidated loan to date. The loan was securitized in JPMCC 2002-CIBC4 with an original balance of $71.0 million.
But analysts at Deutsche Bank said they expect new modified loan balances could fall by 50% in 2013 and liquidation activity will fall around 20%, because servicers are increasingly seeking out alternative workout strategies or in some cases, delaying the workout in the hopes that an improving market would mean no modification was needed over 2012.
“Stabilized property values and more capital in the market have not only helped reduce severities but have allowed some distressed properties a greater ability to right the ship,” the analysts said in the report. “Also, it stands to reason that most of the ‘worst’ loans were the first ones to get worked out and those that remain have more optionality.”