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.