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Bad-loan industry ramps up, triggered by office distress

Special servicers face summer crunch as delinquency rates climb

A photo illustration of Trepp's Manus Clancy and First American Financial Corporation's Xander Snyder (Getty, Trepp, First American Financial Corporation)

A photo illustration of Trepp’s Manus Clancy and First American Financial Corporation’s Xander Snyder (Getty, Trepp, First American Financial Corporation)

Rising distress in commercial mortgage-backed securities has special servicers hustling to keep up.

The Trepp CMBS Special Servicing Rate rose 49 basis points in May to 6.11 percent, in what the analysis provider said was the fourth and most significant month-to-month increase this year.

“Special servicers are definitely getting busier,” said Manus Clancy, head of data and research at Trepp. Still, “the volume seems manageable” so far and is “nowhere near where we were in 2008 to 2010 or at the outset of Covid,” Clancy said.

For comparison, the Trepp Special Servicing Rate shot up 168 basis points in May 2020 to 6.07 percent from 4.39 percent in April, early in the pandemic.

But the pandemic’s aftereffects — major increases in remote work, inflation, interest rates and online shopping — are coming to the fore.

Six months ago, the rate was 4.95 percent, and a year ago it was 4.76 percent, according to Trepp. The two property types primarily responsible for the special servicing rate increase are mixed-use and office, with the latter rising 104 basis points to 6.43 percent.

It’s also the first time since December 2017 that the office special servicing rate has been above 6 percent. The month-over-month increase in the office special servicing rate was the largest since 2010, Trepp said.

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Special servicers represent the interests of investors whose commercial mortgage-backed securities include loans that become delinquent. They aim to collect loan payments, or, if necessary, force a foreclosure sale of the properties securing the debt.

Servicers “are gradually getting ready” for the busy season, Clancy said, “but there is no sign of panic hiring.” 

“Their teams went through hell in April 2020 with the forbearance requests so the current churn probably seems quaint in comparison,” Clancy said.

Major players in the industry may especially not be as quick to seek additional help as hiring slows as a whole, according to Xander Snyder, an economist at the title insurance firm First American Financial Corporation.

“At a very high level, special servicers should see their business increase as more loans become challenged,” Snyder said. However, pointing to some of the big servicers, such as PNC Bank and Wells Fargo, Synder said that hiring additional arms for special servicing may not be a priority.

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“For some of the largest servicers, it’s such a small part of their business that job gains in that division may be more than offset by losses in other divisions if the company is being careful with ‘expense management’ right now,” Snyder said.

As of June 20, there were at least five open positions for special servicing at PNC Bank. Other major servicers KeyBank, Wells Fargo, Berkadia and CBRE Loan Services did not list openings for special servicer roles on their websites at the time of publication.

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CmbsCommercialManus ClancyOfficePNCResidentialTreppWells FargoXander Snyder