What is a Special Servicer?
CMBS loans are pooled together, securitized and sold to investors on the secondary market. Therefore, they are not generally serviced by the original lender. Instead, they are generally serviced by a master servicer, a third-party company that handles payments and communicating with borrowers. However, if a CMBS loan goes into default, servicing will generally be switched to a special servicer, which will work to determine if the borrower can once again become current on their loan.
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Special Servicers and CMBS Financing
CMBS loans are pooled together, securitized and sold to investors on the secondary market as commercial mortgage backed securities. Therefore, they are not generally serviced by the original lender. Instead, they are generally serviced by a master servicer, a third-party company that handles payments and communicating with borrowers. However, if a CMBS loan goes into default, servicing will generally be switched to a special servicer, which will work to determine if the borrower can once again become current (generally through a debt workout or loan modification). However, a traditional loan default is not the only event that can cause a loan to be sent to a special servicer-- sometimes, simply losing a major tenant can cause a loan to be sent to special servicing.
While some special servicers genuinely attempt to help borrowers keep ownership of their property, some servicing companies may do more harm than good. It’s important to realize that special servicers are only paid as long as a loan is in default, creating an inherent conflict of interest between the special servicer and the borrower. If the borrower once again becomes current on their loan, the servicing company stops getting paid.
Special Servicers and Pooling and Servicing Agreements
CMBS loans are governed by pooling and servicing agreements (PSAs), which name the master servicer, the potential special servicer, and the rights of each of these parties. Many PSAs give a special servicer the right to purchase a property at a discount if the special servicer decides the loan cannot be salvaged, creating another conflict of interest between borrowers and special servicers. In essence, a special servicer may want to see a borrower simply so that they can keep the property for themselves.
All this means that borrowers should be extremely careful about defaulting on conduit loans, as it is usually much more difficult to get a loan modification for a CMBS loan than it is for a traditional bank or life company loan. In addition, borrowers should take a close look at the loan’s PSA to see what special servicer will be used, as some companies have better reputations than others.
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Related Questions
What is the role of a special servicer in a CMBS loan?
The role of a special servicer in a CMBS loan is to work to resolve the default through some type of loan modification. Special servicers are obligated to work in the best interests of the CMBS investors who own the debt, not the borrower. Additionally, special servicers are typically only compensated during the loan default period, so it’s technically in their best financial interest if the process is long and drawn-out. Additionally, most CMBS loans have provisions that bestow special servicers with the right to purchase a foreclosed property from the CMBS investors (usually at a substantially discounted price), which means it is a huge benefit to them should the borrower lose the property. Source 1, Source 2, Source 3.
What are the responsibilities of a special servicer in a CMBS loan?
In most loan transactions, the servicer of the loan will at least try to help get the borrower back on track with their mortgage payments, typically via a loan modification or debt workout. Special servicers for CMBS financing, however, have the singular stated goal of advocating for the CMBS investors, not helping out the borrower — though oftentimes they are one and the same thing.
Special servicers are typically responsible for the following tasks:
- Managing the loan default process
- Negotiating loan modifications and debt workouts
- Foreclosing on the property if necessary
- Purchasing the foreclosed property from the CMBS investors (usually at a discounted price)
Source: apartment.loans/posts/cmbs-special-servicers and www.multifamily.loans/apartment-finance-blog/special-servicers-for-cmbs-loans
How does a special servicer affect a CMBS loan?
A special servicer is typically assigned to a CMBS loan when it goes into default. The special servicer's role is to work to determine if the borrower can once again become current (generally through a debt workout or loan modification). However, some special servicers tend to be more concerned with their own profits than they are in providing aid to the CMBS investors. As a matter of fact, special servicers are typically only compensated during the loan default period, so it’s technically in their best financial interest if the process is long and drawn-out. Additionally, most CMBS loans have provisions that bestow special servicers with the right to purchase a foreclosed property from the CMBS investors (usually at a substantially discounted price).
In certain situations, routine tasks and borrower communication may be handled by a third type of loan servicer, known as a primary servicer. This allows a master servicer to handle a larger volume of loans at once.
What are the benefits of having a special servicer in a CMBS loan?
Having a special servicer in a CMBS loan can be beneficial in a few ways. First, they can help the borrower get back on track with their mortgage payments, typically via a loan modification or debt workout. Additionally, special servicers are typically only compensated during the loan default period, so they have an incentive to help the borrower get out of default. Finally, most CMBS loans have provisions that bestow special servicers with the right to purchase a foreclosed property from the CMBS investors (usually at a substantially discounted price).
Sources:
What are the risks associated with a special servicer in a CMBS loan?
The risks associated with a special servicer in a CMBS loan include the potential for a conflict of interest between the special servicer and the borrower, as the special servicer is only paid as long as the loan is in default. Additionally, some special servicers may do more harm than good, and some CMBS loan agreements could make a loan go into default for non-monetary reasons (referred to as a technical default), sometimes for something as simple as sending a servicer a late P&L statement.
For this reason, potential CMBS borrowers should always make sure to hire highly experienced counsel to review all their loan documents before they sign anything. Of particular importance is the loan’s Pooling and Servicing Agreement (PSA), which identifies the names, rights, and responsibilities of the special servicer and the master servicer. As some of these agreements are 500+ pages long, borrowers will want a qualified attorney experienced with CMBS financing to review them and point out any potential concerns before they move forward with the closing process.