This past April, GlobeSt.com reported on the potential for conflicts of interest—or investors’ perception that such conflicts exist—among special servicers engaged in workouts of CRE loans that have gone sour. Now the issue is back in the headlines, amid word that the CRE Finance Council is helping servicers and investors work on new disclosure guidelines for the servicers. The servicers “are tired of getting beaten up,” Stephen M. Renna, the council’s CEO, told the Wall Street Journal last week.

Helping lead to that kind of bruising are the concerns described in a report by Deutsche Bank analyst Harris Trifon. Trifon, who titled his report “Presenting the Modified Loan All-Star Team,” told the WSJ that the dozen big restructured mortgages detailed in his report represent “the poster children for questionable behavior.”

This so-called questionable—if lawful—behavior takes a variety of forms that irk investors, notwithstanding that the servicers’ actions may be dictated by pooling and servicing agreements in legacy CMBS deals. Some believe that special servicers restructure loans at terms that are too generous to owners, or that they sell the assets for too little. Eric Lindner, an executive managing director at Situs, told GlobeSt.com’s Robert Carr in April that there’s an industry perception that servicers with multiple hands in a CMBS deal may focus more on fees than the recovery of assets.

In a commentary published last month, New York City-based Kroll Bond Ratings noted that “investor concerns over potential conflicts of interest have continued to simmer on issues regarding affiliate fees, servicer compensation and fair value purchase options” as the volume of specially serviced loans began to swell amid the Great Recession. “The concerns have, at times, ‘boiled over’ following mainstream news reports on certain asset resolutions,” according to Kroll. “Some of these resolutions were quite complex—making them challenging to explain in a newspaper article, particularly when all of the details aren’t readily available to reporters.” Much of this “investor unease,” though, could be resolved through better disclosure and increased transparency, the ratings agency says.

CREFC plainly is aware of the potential for collateral damage from questions of transparency and potential conflicts of interest. “If left unaddressed, these issues can pose a serious threat to the continued vitality of the CMBS market by damaging investors’ trust in their ability to invest in a structured finance market that offers transparent reporting and sound management of inherent conflicts of interest,” according to a CREFC paper, published earlier this spring, outlining its recommendations for best practices in enhancing transparency and addressing potential conflicts.

These recommendations cover subjects that range from determining fair value in asset sales and fees paid to servicers by the borrowers to generating additional fee streams through the use of commercial brokerages or investment banking operations owned by the servicers’ parent companies. Although investors realize that servicers’ use of these affiliated firms can allow for “the highest resolution value” to a CMBS trust, there’s also the possibility of a conflict if the servicer seeks a resolution based on receiving an above-market fee rather than maximizing trust proceeds, according to the CREFC paper.

As an example of its recommendations, CREFC says that “to avoid a clear potential conflict of interest,” special servicer affiliates shouldn’t raise debt or equity funds for entities bidding to buy any assets from the trusts they service. “Otherwise they have a financial incentive to close asset sales from the trust with their outside clients, rather than other potential buyers of the asset that do not generate the excess fees.”

(Visit the Distressed Assets page on GlobeSt.com.)

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CREFC Aims at Better Disclosure for Servicers

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