In commercial real estate (CRE), there is a distinct type of loan servicing, called special servicing, that is designed to specifically help resolve troubled commercial loans. These servicers can work with the borrowers who have fallen behind on their mortgage or have defaulted on a term or clause of the loan to determine the best possible outcome for both parties, including alternatives to foreclosure. Learn what special servicing is, how it works in commercial real estate, and what it's like to work with a special servicer.
Standard servicing and then some
A loan servicer is a company that collects and handles the daily administrative tasks related to collecting a mortgage loan. Since most loans are packaged and sold on the secondary mortgage market as mortgage-backed securities, loans are typically serviced by a third-party servicing company. Payments on a commercial or residential loan created by an institutional lender, such as a bank, lending institution, or non-bank lender are made to a servicing company, who in most cases is not the original lender. The servicer collects and remits payments, sends statements and notices to the borrower and lender, and handles regulatory compliance for the collection of the loan.
Special servicing goes beyond the standard duties of a traditional servicing company, having the ability and training to assist in resolving sub-performing or delinquent conduit loans or commercial mortgage-backed securities (CMBS) that are owned by CMBS trusts.
After the Dodd-Frank Act was introduced in 2010, major regulatory hurdles and restrictions were made to the servicing sector, requiring additional communication, notices, licensing, and regulatory compliance for servicing companies. Special servicing companies are equipped to handle the resolution of debt while remaining compliant and can assist with:
- Handling loan remittances, including calculating unpaid interest, arrears, or other fees and penalties for the loan
- Negotiating and reviewing foreclosure alternative applications, such as a loan modification, forbearance plan, or deed in lieu of foreclosure
- Communicating with the borrower or borrower's counsel on behalf of the client
- Ensuring property taxes are being maintained and paid
- Securing the property with special insurance, if needed
- Enforcing the mortgage documents, which may include engaging and communicating with outside legal counsel to initiate foreclosure or monitoring bankruptcy proceedings
- Manage and market real estate owned property (REO)
Working with a special servicer
Most special servicing loans are delinquent mortgages, meaning the borrower is 90 days or more past due on their loan. However, some special servicing loans are flagged as sub-performing or troubled loans because of the property's condition, past-due property taxes, lapsed property insurance, or a loss of a large tenant. These loans are seen as potential problem loans and are sent to the special servicer to help find a resolution before they become a further liability.
Because there are far more regulatory hoops to jump through in the special servicing world, special servicers charge CMBS trusts or loan companies more than a standard servicing firm does for their duties. They also get paid on a loan-by-loan basis for as long as the loan is in special servicing, which many see as a potential conflict of interest since the longer the loan is in special servicing, the more money the company makes.
Some special servicing companies are better to work with than others and are better equipped to offer assistance to borrowers in need through a streamlined process. If your commercial loan is in special servicing, you should immediately contact the special servicing company to request assistance -- the sooner you contact them, the better. Each company will have a different process for applying for foreclosure prevention alternatives, but most start with an application for assistance and a hardship letter.
Certain special servicers can take weeks or even months to decide if you qualify for assistance, and in most cases will continue to proceed with foreclosure in the meantime. If you are mid- to late-stage foreclosure, contact your servicing company but also look at alternatives in the private market, such as selling the property to pay off the loan if there’s equity.
Special servicing has an important role in the mortgage marketplace, especially in troubled times where loan delinquency is high. While they can provide much-needed assistance to commercial property owners and real estate investors, sometimes they fall short. Working with a special servicing provider in most cases should be avoided if possible.
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