Special servicers – these are the folks that take over the handling of loans that are delinquent or in default. In large, commercial mortgages, special servicers are typically given sweeping powers to protect the rights of the noteholders and insure that all amounts due under the note and mortgage are collected. A new probe launched by the New York Department of Financial Services suggests that some of these special servicers may be more interested in lining their pockets than protecting the bondholders. According to a story first appearing in Reuters, CWCapital Asset Management, LNR Partners and C-III Asset Management (the nation’s largest commercial servicer) are now all the subject of an investigation by New York State regulators for potential conflicts of interest.
We are involved in several cases involving CWCapital Management and LNR Partners and are seeking information from anyone with knowledge of their practices.
As noted above, special servicers enter the picture when a commercial loan defaults. Their role is to protect the property, collect mortgages and insure the noteholders are protected. For those duties, servicers earn a fee based on the amount of the mortgage and complexity of the financing deal. Regulators say that the three largest commercial servicing firms – CWCapital Asset Management, LNR Partners and C-III Asset Management – also have their own investment arm to acquire distressed properties.
Typically, bondholders will sell a nonperforming loan to the highest bidder. The “troubled asset” is removed from the pool of loans held by bondholders and auctioned for the highest price. What happens if the highest bidder is also the same company that is acting as the servicer? That is what New York regulators are now examining.
It’s possible to wear more than one hat in a commercial real estate transaction, although the potential for conflict increases dramatically. The noteholders want the highest possible price for the troubled property and rely on the servicer to get the best price. Yet at the same time, an affiliate of the servicer wants to buy the property at the lowest possible price.
There are no allegations of wrongdoing by New York State. At this point, the state’s investigation is in its infancy. We believe, however, that actual conflicts of interest do exist; conflicts that hurt both the struggling property owner and the note holders.
If you have information about practices at CWCapital Asset Management, LNR Partners, C-III Asset Management or any other CMBS servicer, we would like to hear from you. With an estimated $100 billion in commercial loans presently in default or in trouble, there should be plenty of answers to New York’s questions.
The purpose of this post is to seek information. The companies listed in this post have not been charged by regulators with any wrongdoing. If you have information, please contact attorney Christopher Katers at or contact the author, Brian Mahany, at (414) 704-6731 (direct).