Before the economic downturn, when delinquencies were lessprevalent, junior and mezzanine lenders had less reason andoccasion to fear for their investments. A sense of complacencydescended on the lending community at a time when most loans simplywere repaid. Occasionally, junior lenders knew so little about thestate of some debt investments that one might hear from a seniorlender or a servicer only after a borrower had already missedseveral interest payments. But loan payments generally flowed backinto lenders' coffers without much fuss or maintenance, and manyjunior lenders let the default arrangement ride, allowing thespecial servicer already in place to lasso in the relatively rarestray borrower.

[IMGCAP(2)]In 2009, however, as the market softened andborrowers found loan payments increasingly difficult to make,defaults began a steep climb and special servicers found themselveswith a glut of business on their hands. With that spike in activitycame an increased awareness among junior lenders that they shouldpay heed to their own interests rather than riding the wave of thelarger lender pool.

Choosing and working with a special servicer with which a juniorlender is familiar or has a prior relationship can help a lenderstay ahead of the curve. Knowledgeable and informed legalrepresentation can help a junior lender obtain rights within anintercreditor or co-lender agreement to replace the loan'sappointed special servicer with a special servicer of its ownchoosing. Even if not acted upon, the option is one that lendersshould take care to have in place. A special servicer placed by amaster servicer is certainly not a negative option, but a specialservicer appointed by a junior lender provides the additionaladvantages of a familiar face and may facilitate a more direct lineof communication between the lender, the borrower and the specialservicer. It should be noted that the option to install a specialservicer on behalf of a junior lender is typically conditional onthe satisfaction of certain conditions, foremost being theservicer's credit rating.