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Commercial Special Servicers Saddled with High Troubled Loan Volumes

With refinancing in the commercial real estate (CRE) sector still hard to come by and delinquencies continuing to rise, special servicers of commercial mortgages are dealing with large influxes of new troubled loans.


Primary and master servicers ranked by ""Standard & Poor's"":http://www.standardandpoors.com have reported a continuous rise in delinquent CRE loans since the second half of 2007, with delinquencies hitting new all-time highs at the end of 2009, the ratings agency said in ""a recent report"":http://www2.standardandpoors.com/spf/pdf/events/SFTcon040810.pdf.

Michael Merriam, Standard & Poor's servicer analyst, explained that between June and December of last year, total delinquencies within primary servicing portfolios increased to 4.59 percent from 2.90 percent based on loan count. Looking at outstanding principal balances, the delinquency rate increased to 5.50 percent from 3.28 percent.

Although loan transfers to special servicers actually eased somewhat compared with the first half â€" the number of new transfers fell 4 percent, while the dollar volume dropped a more significant 19.5 percent â€" Standard & Poor's believes the large-balance retail loans that entered special servicing earlier in 2009 as a result of General Growth Properties' April 2009 bankruptcy filing may have skewed this comparison.

The ratings agency also noted that upcoming loan maturities and other imminent or nonmonetary defaults, rather than actual missed payments, also continued to


account for nearly 60 percent of all transfer activity by loan count in the second half of 2009.

In total, special servicers' loan portfolios grew 26 percent to 5,676 loans at year-end 2009 compared with midyear, S&P said. Their REO portfolios also grew 26 percent to 946 properties. In comparison, these same special servicers had $71.1 billion of unresolved assets (4,504 loans and 750 REOs) as of June 30, 2009, and $34.2 billion of unresolved assets (3,966 loans and 576 REOs) as of December 31, 2008.

Looking at recent asset dispositions, Standard & Poor's has observed a steady decline in resolutions that ended more favorably â€" through full payoffs or loan restructuring â€" and a growing percentage of discounted payoffs (DPOs) and foreclosures since mid-2008. The overall average time to complete loan resolutions is also increasing, the ratings agency said.

Standard & Poor's says the recent trends it's observed among special servicers and their primary and master servicing counterparts reinforce the idea that these companies will continue to face hurdles on many fronts in the months ahead.

""We believe that these special servicers generally should still be able to handle their workloads given variations in the complexity and distress of the loans,"" Merriam said. ""However, the assets-to-asset manager ratio will remain an important factor.""

The ratings agency says adequate staffing remains critical, especially for high-volume servicers. Standard & Poor's calculated a composite ratio of 11 assets per asset manager at year-end. However, the ratio for the 10 largest-volume special servicers was approximately 16 assets per asset manager.

A separate study by the CRE research firm ""Delta Associates"":http://www.deltaassociates.com says that the aggregate value of distressed commercial real estate in the United States has now reached $187.4 billion. This figure includes properties in default, foreclosure, and bank-owned REO, and represents a 10 percent increase over January 2009.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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