Special servicing is a term you begin hearing more frequently during times of economic disturbances. For example, during a pandemic which has forced businesses to work from home, office buildings might see a decrease in value and borrowers may be looking for loan extensions or have trouble making their payments. In situations like these, a special servicer is someone who can help service the loan that’s in distress. The special servicer works with the master servicer, or lender, to find an agreement with the borrower so that the lender suffers as little financial loss as possible.

Commercial real estate loans that have been securitized into commercial real estate backed structures (CRBS) are often managed by a pooling and servicing agreement (PSA). The abilities and obligations of the special servicer can vary depending on that agreement. The PSA might give them permission to negotiate with the borrower, or even to take possession of the property in question. As defaults rise, the need for special servicing also rises, and loans in special servicing are at the highest they’ve been since 2012, thanks to the pandemic and lack of need for office spaces in its wake.

How it Works

Special servicing is used for CMBS, with loans of a large value. It isn’t often that a loan of under $2M would enter special servicing.

The process can go many ways, depending on the situation. Sometimes, a lender will begin special servicing before a loan is in trouble, simply heading it off. In other cases, the special servicer might negotiate an extension on a loan’s maturity date if the asset has decreased in value. The most common scenario is that a borrower falls 60-days delinquent on payments and the loan enters default. When this happens, the loan automatically goes into special servicing.

Outcomes can range anywhere from working out a scenario where there are no missed payments and everyone leaves happy, to the special servicer having to liquidate the asset to try and save the entity from as much loss as possible. Whatever the outcome, special servicing is only called upon when something about the loan is abnormal.

Who Offers It?

There are many loan servicing companies in the market, and the services offered can range from those who would act as mediators between the master servicer and the borrower to bondholders or special servicers. Willowbrook Valuation can be called to value distressed assets that are either in default or on the watchlist for a lender. Some special servicers work through financial institutions, like Key Bank and PNC, while others are through government-backed agencies, like Fannie Mae or Freddie Mac.

The servicer is chosen by the lowest-class bondholder in the entity, as that is who suffers a loss first if something goes wrong with the loan.

Partner with Willowbrook Valuation & Advisory Services for Special Servicing Assistance

At Willowbrook Valuation & Advisory Services, we are a leader in trusted insight, cutting-edge innovation, and customer service. We offer exceptional litigation support to assist clients with insurance valuation, arbitration and consulting, property tax services, and expert testimony. To learn more about our valuation, counseling, or litigation services, or office-to-apartment conversions in D.C., please contact us at (202) 919-3888.