Loss Severity Rises While On-Time Pay-Offs Decline – Leveraging Possibilities

23rd April 2014 · Comments Off

March 2014 CMBS loans showed a high rate of liquidations with loss severity (principal lost plus lender advances and liquidation expenses), moving up to the fourth highest monthly volume since January 2010. CW Capital’s multi-billion dollar REO asset sale no doubt contributed to this month’s increase. Overall, ninety-seven percent of liquidated loans in March took losses greater than 2%…to what ends?

Given circumstances such as these, Borrowers—in cooperation with a “Servicer Recommended Borrower Advocate”—are more deftly positioned to persuade Special Servicers to strike an economic deal that keeps the property with the Borrower. When Borrowers don’t make a reasonable or credible bid to hold onto their property, the Special Servicer’s options are then limited to foreclosing or selling the note. An REO property can require multiple advances over several years potentially creating an even greater loss severity for the Servicer and the Trust.

March Average Loss Severity by Property Type

Loans with >2% Loss on Loan Balance

Property Type
# of Loans
Loan Balance
Realized Losses
Loss Severity
Retail 24 1,395,802,341 280,486,120 70.87
Office 23 1,024,064,445 547,112,023 53.43
Multi Family 16 115,089,238 56,022,048 48.68
Lodging 4 92,597,288 48,764,116 52.66
Industrial 5 189,806,028 45,596,073 24.02
Multi Use 2 69,826,800 46,501,995 66.6
TOTAL
74
1,887,186,139
1,024,482,375
54.29

On Target Pay-Offs Decline

The percentage of RE loans paying off on their balloon date was 64.6% in March–the fourth straight month in which the rate declined. By comparison, back in November it was 81.3%–the highest in the last five years. Then began the steady slide downward: 76.5% in December, 71.3% in January, and 68.8% in February.

Morningstar speculates that the decline could be a result of adverse selection from the loans that remained outstanding until maturity. A large percentage of the loans due to mature in March came from the 2004 vintage. With interest rates and spreads so low in 2013, it’s quite possible that the higher quality loans paid off as soon as they came out of lockout, which could have left the more marginal properties outstanding. Those properties, of course, will have the hardest time refinancing.

The Henley Group works on behalf of Borrowers to develop a viable alternative to foreclosure that is of interest to Special Servicers. Please contact us to see how we might help you with your 2014, 2015 and 2016 loan maturities.

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