Who watches out for bond holders once CMBS loans go into default? It was supposed to be the special servicers, even though CMBS pioneers in the mid 1990’s privately had questioned how special servicers could handle a deluge of problem loans, complex loan documents and no previous connection to the borrowers. Early promoters got comfortable with this by predicting only a small chance of mass defaults.
How wrong we were!
Now evident problems involving some special servicers and their handling of tens of billions of dollars in troubled CMBS loans raises questions and further reinforces market doubts about CMBS structures and relationship.
Borrowers continue to face hurdles in pursuing workouts of their CMBS loans. They have nobody to talk to! This article also highlights the questionable practices by special servicers, including holding back on resolving loans to feed fee machines, side dealing, profitable trades at the expense of the trust, and self-servicing abuse of document loopholes. It further states that these servicers take advantage of the lack of oversight since mechanisms were never put in place over them to protect the bondholders.
Besides the potential for lawsuits (which clearly exists), the industry must put in place a clear mechanism for oversight of these special servicers or the CMBS world will continue to flounder.