Servicers used to waste little time pushing troubled commercial mortgage loans into foreclosure. That changed dramatically after the Global Financial Crisis, and now, according to new analysis from Trepp, the path from delinquency to resolution looks nothing like it did before 2008.
Trepp examined commercial mortgage-backed securities from different loan vintages to see how long it typically takes for a delinquent loan to be resolved—either through a modification or by sliding into default and becoming real estate owned. The difference between the pre-crisis years and the past decade and a half is stark.
In the CMBS 1.0 era before the financial crisis, servicers tended to move aggressively. Trepp found the median timeline from a loan becoming 30 days delinquent to either a modification or foreclosure was about 14 months in both cases. Modifications could drag out somewhat since there was little regulatory or political pressure to work out troubled debt. Capital markets preferred quick foreclosures to produce cleaner resolutions, and many distressed borrowers were already deep underwater thanks to inflated underwriting and falling property values.
That approach flipped after 2010. Under what’s often referred to as CMBS 2.0, the timeline from delinquency to modification fell by more than 80%, dropping to just 2.7 months on average. Servicers appeared eager to act quickly, a change Trepp attributes in part to the aftermath of widespread defaults and the legal controversies around foreclosure practices during the crisis. At the same time, the foreclosure process slowed considerably. From 2010 onward, the period from delinquency to REO stretched nearly 40% longer, averaging 19.5 months. By 2020, that process exceeded three years.
Several forces shaped this new behavior, according to Trepp. Policymakers pushed lenders to emphasize modification over foreclosure through programs like the Home Affordable Modification Program in the residential sector and corresponding scrutiny in commercial markets. Lenders also hesitated to book immediate losses, while some states deliberately extended foreclosure timelines to avoid overwhelming the courts. Another factor was the industry’s reliance on “extend-and-pretend,” delaying foreclosures in hopes that market conditions would rebound.
The trend has only intensified for the CMBS 3.0 vintages of 2020 and beyond. Trepp found the path to REO extended to 38 months, in large part because of pandemic-era foreclosure moratoriums, courts imposing delays, and uncertainty over proper valuations. Even as markets reopened, the preference for delaying foreclosures continued, particularly in hard-hit sectors such as office and retail.
What hasn’t changed since 2010 is the speed of modifications. Trepp said post-crisis loans still enter the one-to-three-month window from first delinquency to modification, as servicers and regulators look to stabilize values quickly. With interest rates still high and market pressures ongoing, further rounds of modifications may be necessary—yet another sign that recognizing losses has become as much about timing as market fundamentals.
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