KBRA Releases Research – CMBS Servicer Advance Trends: Curtailment and Recovery

KBRA releases research on the trends in commercial mortgage-backed securities (CMBS) servicer advances and their curtailment and recovery.

The specially serviced loan rate in KBRA-rated private-label U.S. CMBS continued to trend higher in June as it breached 6%, ending 1H 2023 at 6.07%. Of these specially serviced loans, just over one-half are delinquent. With increasing distress in commercial real estate (CRE) markets, the amount of loans requiring servicing advances in CMBS 2.0 has risen dramatically, growing 38.5% to $32.4 billion from $23.4 billion over the 12 months ended June 2023. Although outstanding servicer advances rose a more modest 6.8% during the same period, as newer delinquent and specially serviced loans have less time to accumulate advances, such amounts are expected to climb in the coming months. As this will occur during a period of expected property value declines, it will inevitably lead to an increase in appraisal reduction amounts (ARA), non-recoverable advances (NRA), and workout-delayed reimbursement amounts (WODRA). For some transactions, this will have a meaningful impact on trust cash flows. Given the expected increase in servicer advances, KBRA has conducted a study on how these advances—along with ARAs, NRA determinations, and recoveries via WODRAs—have trended over the past year.

Key observations from the report are as follows:

• The total outstanding advances among delinquent and specially serviced loans are, on average, 9.1% of outstanding balance and 8.6% of appraised value, and accumulated over 28.3 months while in special servicing.
• Despite the 38.5% increase in the balance of loans with advances, the number of loans actually decreased 14.4% to 680 from 794, as 349 loans ($7.3 billion) either paid off or became current and returned to the master servicer. A smaller number of loans (252, $16.5 billion) became newly delinquent or specially serviced.
• Total ARAs rose a more modest 4.2% ($5.3 billion) on $13 billion of loans, which had an average ARA of 40.3% of loan balance, down from 44.6% as of June 2022.
• Loans determined to have NRAs, while still relatively small in number and amount, nearly doubled to 59 from 31 across $1.8 billion (78.5% increase) of loan balance.
• WODRAs remain fairly infrequent but have increased to $22 million (71.7% increase) on 18 loans totaling $771 million, which does not include WODRAs on six loans ($288.7 million) that have resolved over the past year with no losses.
• Conduits with the most in outstanding advances are generally from the 2013-15 vintages, as these generally have higher delinquency levels.
• Single-asset single borrower (SASB) transactions with the highest levels of advances are generally collateralized by lodging loans (eight of the top 15) that transferred to the special servicer in 2020 during the pandemic, as well as office loans (five of the top 15), which have more recently transferred due to the sector’s numerous challenges.

Click here to view the report.

Related Publications

• CMBS Loan Performance Trends: July 2023
• U.S. CRE CPL Securitization: Poised for a Comeback?
• KBRA CMBS Loss Compendium Update: June 2023
• CMBS Trend Watch: June 2023

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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