In the CMBS world, special servicers don’t have the luxury of ignoring potential losses and deferring action on distressed loans. Once a loan is transferred to special servicing, the servicer must react in the best interests of the REMIC certificate holders, maximizing recovery on the transferred loan on a present value basis. Waiting around in the hope that the borrower will be able to turn around a distressed property would not meet this standard.

Rather, definitive action is required. In some cases, that may mean a modification or extension of the loan but, in most instances, a sale or foreclosure is the best course of action. And once a property is foreclosed, the REMIC trust cannot hold the asset indefinitely. REMIC rules require that the special servicer dispose of owned real estate (REO) by the end of the third year in which title to the property is obtained. While the Internal Revenue Service can grant an extension, most special servicers realize that extended retention does nothing to increase value.

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