cmbs special servicers and adverse selection in commercial.pdf

CMBS Special Servicers and Adverse Selection in Commercial Mortgage Markets: Theory and Evidence∗ Brent W. Ambrose, Pennsylvania State University Anthony B. Sanders, Arizona State University and Abdullah Yavas, Pennsylvania State University ∗The authors would like to thank Intex for the commercial loan data and Jun Chen, Joseph L. Pagliari and Sally Gordon for helpful comments. Ambrose and Yavas acknowledge the support of the Real Estate Research Institute and the Smeal Summer Research Grant. CMBS Special Servicers and Adverse Selection in Commercial Mortgage Markets: Theory and Evidence Abstract Special servicers play an important role in reducing losses associated with troubled loans. One of these functions involves the administration and disposition of troubled loans. When a loan in a CMBS deal fails to perform as expected, the master servicer sends the loan to a “special servicer.” The special servicer has wide latitude to foreclose on the loan or modify the loan terms in an effort to maximize the cash flows to the CMBS investors. Since the first-loss investors have the most at stake when a loan fails to perform, these investors often control the appointment of the special servicer. In fact, the special servicer often holds a portion of the first-loss piece in order to properly align the incentives of the investors and the special servicer. As such, the special servicer may not be concerned with the borrowers position, but rather may undertake actions (modification, foreclosure, etc.) that maximize the position of the first-loss investors. This paper offers theoretical arguments and empirical evidence for the possible correlation between the default risk for a pool and whether or n