Commercial Servicers Respond to Katrina

A number of commercial servicers with properties in the areas impacted by Hurricane Katrina are in the process of assessing the challenges they face, according to Standard & Poor's.

The rating agency reports that a number of commercial mortgage-backed securities servicers they contacted are "being appropriately aggressive in their efforts to establish communication with borrowers."

The way in which insurers assess the damage, determining whether it is caused by wind or flooding, may impact the processing of policy proceeds and timeframes for payout, one servicer pointed out.

Servicers are reporting that getting to the bottom of the collateral damage is an ongoing task and will take much more time to determine. A few servicers are "contending with default situations correlated to properties with significant damage." And the process to transfer some loans to special servicing is already underway.

Michael Merriam, a director in S&P's servicer evaluations group, said, "So far, servicers tell us that the biggest challenge they anticipate will be completing property damage assessments and pursuing subsequent insurance claims.

"To date, no servicer has stressed an immediate need for additional insurance administration staff due to increased workload brought on by Hurricane Katrina." Mr. Merriam notes that not all flooded properties may have been required to maintain flood coverage.

Commercial servicers have indicated that at the most very few procedural changes will be necessary to handle the servicing tasks for the impacted loans. However, "The external circumstances surrounding the loans may impair a servicer's ability to execute these tasks without incident or exception," S&P points out. Servicers are also going to face the issue of whether to transfer CMBS loans that default due to Katrina-related factors to a special servicer.

Mr. Merriam noted, "This position is based on the fact that even if an insurance claim looks like the only probable path at first glance, other property damage issues are probably going to arise that would better be handled by a special servicer.

"Once a loan is transferred, the special servicer can explore forbearance arrangements and any restructuring potential. The special can also investigate engineering, environmental and structural conditions while concurrently pursuing insurance claims."

As a fallout of Katrina, the rating agency expects an increase in asset transfers to special servicers for the rest of the year.

S&P also believes that "in addition to some immediate payment defaults, the pervasiveness of hurricane damage to the region poses several other near- and long-term servicing dilemmas that will affect any commercial mortgage loan with collateral in the Katrina disaster region."

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