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Length of Time To Dispose of CMBS REO Properties Increasing

June 9, 2014
REO inventories and disposition times are modestly increasing for all CMBS special servicers compared to year end 2012, according to Fitch Ratings.

REO assets as a percentage of specially serviced portfolios have grown for three of the largest Fitch rated special servicers.

As of year-end 2013, REO assets made up 45% on average of specially serviced loans between C-III Asset Management LLC, LNR Partners, and CWCapital Asset Management LLC, compared to 37% as of a year earlier.

REO hold times have increased to 15.8 months as of Dec. 31, 2013 from 12.9 months as of Dec. 31, 2012.

The growth in the number of REO assets stands in contrast to the continued pace of loan resolutions and broader commercial real estate market recovery driven by improving property performance and market liquidity.

The quality of the remaining REO properties is a major factor contributing to this shift in specially serviced portfolios, Fitch said.

“While special servicers have been successful in disposing of stabilized properties in primary and secondary markets, tertiary markets continue to struggle, particularly for office and retail assets impacted by low occupancy or pending lease maturities” said Adam Fox, senior director at Fitch.

As of year-end 2013, LNR Partners was servicing 433 REO properties; CWCapital Asset Management, 405; and C-III Asset Management had 193 such properties.

Fitch makes use of aging and resolution information during its surveillance of CMBS transactions when calculating expected losses for specially serviced loans. Fitch estimates expected losses based on the loan’s performance status and updated value information provided by the special servicer.

These valuations are then discounted to account for fees (including, but not limited to, property protection advances, servicing fees, and transaction costs), changing valuations, and timing of the workout.

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