In February 2009, a portfolio of seven office buildings owned by Younan Properties Inc., Woodlands Hills, California, transferred into special servicing, reported Bethesda, Maryland-based CoStar Group Inc.; in October, seven Stamford, Connecticut, office buildings acquired by New York City real estate developer Aby Rosen were put in special servicing, The Wall Street Journal disclosed; and in December, the loans of New York-based Vornado Realty Trust on Springfield Mall in Springfield, Virginia, were referred to a special servicer, the Washington Business Journal revealed. * Just in those three portfolios of troubled mortgages, that's an estimated $700 million in loans now in the hands of special servicers--a heady title for a relatively small group of financial companies that are designated and rated by the rating agencies as capable of working out troubled commercial mortgage-backed securities (CMBS). * "What's special about special servicers?," Brian Hanson, a managing director at CWCapital Asset Management, Washington, D.C., asks rhetorically. "We would like to think it's us, but it's the loans. They need special attention." * Talk about a growth business. In 2009, when the U.S. unemployment rate was tripping upward into double-digits, one industry was madly hiring new people--CMBS special servicing (and its cousin, residential servicing). Sure, it's a bit of irony that it was the real estate market in combination with the financial sector that pushed the U.S. economy off a cliff in 2007 and dumped thousands and thousands of workers into unemployment, and then just two years later that deadly combo was one of the most aggressive hirers of any domestic industry.
"Midland has been focused on the potential for significant volume increases for the past 24 months, and our staffing has essentially tripled over the past 24 months," notes Stacey Berger, executive vice president at Overland Park, Kansas-based Midland Loan Services Inc., a division of Pittsburgh-based PNC Financial Services Group Inc. "Historically, we only had a special servicing staff in Kansas City. We hired senior people and opened offices in Dallas and Atlanta, and continue to expand those offices."
Over at CWCapital, a division of Montreal-based Caisse de depot et placement du Quebec, Hanson reports, "We began hiring in earnest earlier [in 2009]. We hired over 40 people just in the asset management group to keep up with the pace of volume."
J.E. Robert Companies, McLean, Virginia, has been a special servicer since the Resolution Trust Corporation (RTC) era of the early 1990s and has continuously altered staff levels over the years to meet demand.
"We ramped up to deal with the significant loan flow coming out of the RTC transactions, then ramped it down as the cycle turned, and now we are ramping back up," says Keith Belcher, a managing director of J.E. Robert Companies. "We were fortunate to draw some resources from the historic network of people and relationships for us to add staff. We had gray-haired people like myself who have been through it before, a long-standing platform, a network of resources, and we added significant staff along the way."
Even with all those new hires, the big question is, do the special servicers have enough people to handle the billions of dollars worth of CMBS now considered in default or imminently delinquent now being dumped into their collective laps?
A rising tide
Trepp LLC, New York, has been tracking the payoff percentage of loans reaching their maturity date. Since the beginning of 2009, the percentage of loans not paying off on their balloon date (by balance) has, well, ballooned.
In mid-2008, which was after the credit crunch had begun, the payoff percentage by balances were still regularly above the 70 percent level after the loan hit the date when payment ballooned, Trepp reports. Then delinquencies started rising, and in August and September 2009, the number of borrowers able to...