CMBS Special Servicers – A Billion Dollar Problem?

A recent article by the CoStar News Team claims, “the gradual appreciation in leasing activity and property values has largely supported the quiet resolution of nearly $5 billion of properties that went into distress in the aftermath of the Great Recession. Despite dire predictions of commercial real estate being inundated by a wave of loan defaults, much of the property with loans that were 'underwater' are coming back to market with values near or exceeding past peaks.”

That’s great news for those commercial real estate borrowers that survived the “great recession.” Unfortunately, during the last few years many CRE and CMBS projects were acquired directly by lenders and servicers for their own portfolio.

While not illegal per se, servicers that acquire property for their own gain often cross legal, ethical and moral lines.

In recent years we have seen servicers intentionally thwart or prevent borrowers from refinancing or curing property defaults. Some of the largest servicers in the nation including CWCapital and LNR Partners have been sued or accused of such misconduct. Others have declared “technical” defaults even though the borrower never missed a payment.

Generally, servicers have a duty to the holder of the note and mortgage. When a borrower is in trouble, their duty is both to preserve the asset (property) securing the loan and to insure the noteholders get the maximum value if the property must be liquidated.

Often the noteholders are better off financially if they can keep the property occupied. Sometimes a troubled borrower just needs a little time or help to catch up. When servicers attempt to acquire the property for their own profit, however, conflicts of interest abound. Obviously, if the servicer wants to acquire the property, it wants to do so as inexpensively as possible. Yet their duty to the noteholders is to get the maximum price.

And the duty of good faith and fair dealing owed to borrowers? “Forget-about-it” as some would say.

We repeatedly hear from borrowers who were told that if they simply skipped a payment, their loan could go from servicing to special servicing. There, a company like CWCapital would “help” them negotiate better terms. Instead, the only help they received was having the property taken from them and sold at fire sale prices.

Even if the special servicer doesn’t try to acquire the property for its own portfolio, special servicers have no real incentive to help borrowers get back on their feet and return to being current on loan payments. Why? Because special servicers only earn their huge fees when the property is in special servicing status. If the loan becomes current, there are no more fees for the servicer.

The current system is broken and filled with inherent conflicts of interest. In our opinion, both borrowers and lenders lose. The special servicers, however, have opportunities to make money both from large fees and from acquiring the property at fire sale prices.

As I write this post, CoStar reports that CWCapital is getting ready to sell a $2.12 billion portfolio of CMBS properties. Did all these properties have to be sold? Probably not.

If you are a borrower or noteholder and feel that a servicer ripped you off, give us a call. For more information, contact attorney Brian Mahany at [hidden email] or by telephone at (414) 704-6731 (direct).

MahanyLaw and Judge, Lang & Katers – America’s Lender Liability Lawyers.

[Want to read more? Visit the MahanyLaw blog and use the search box for CWCapital, LNR or CMBS for many more articles.]

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