With some 13% of commercial mortgage-backed securities in special servicing, the largest players in the market say they are bracing for bigger loans and more volume in their pipelines. In addition, at least one panelist predicted more delinquent CMBS would move to REO status. The comments were made during a panel discussion on CMBS special servicing at the Urban Land Institute‘s annual conference in Los Angeles. The four panelists, from LNR Asset Services, Midland Loan Services Inc., CWCapital Asset Management LLC and C-III Asset Management LLC, hold 90% of all CMBS assetsheld in special servicing. Significant numbers of large balance loans will be maturing over the next five years, with a good portion of those in 2012, panelists said. Large balance loans also bring with them more complexity as they come highly structured with mezzanine and subordinated positions. “Among the challenges is an incredible increase in volume,” said Tom Nealon, vice chairman at LNR. Three, four or five years ago, LNR had about 150 specially serviced loans, he said. “Now we have 1,500,” he said. “It’s sort of a daunting number.” Nealon said his company is trying to make a decision on what direction to go on a loan within the first 60 days. “The big problem is the lack of credit and the large number of maturities coming up,” he said. The process of special servicing CMBS can be a time-consuming and somewhat complicated process, said Andrew Hundertmark, senior vice president at CWCapital. “It’s not our desire to move slowly,” he said, but added that special servicers are delayed by the need to gather information as well as by jurisdictional issues. Unlike major residential servicers, who have agreed to stop dual-tracking by having loans in foreclosure while also seeking a workout, CMBS special servicers said they follow a dual-track to exert pressure on the borrower to resolve the loan’s issues. Their arsenal to resolve delinquent CMBS includes interest-only loans for a set period of time, loan extensions, principal write-downs and new structures that include an equity infusion by the borrower or a partner the borrower brings to the table. Smaller loans — typically those under $5 million — tend to involve a less sophisticated and less financially secure borrower and are more likely to be sold as notes or end up as REO. Larger loans may have a Wall Street-backed borrower who has the ability to put equity into the deal and make it work, Hundertmark said. Larger loans also tend to be backed by property that piques the interest of investors on the prowl for opportunities, panelists said. Affiliates of special servicers have the ability to bid on properties they are servicing, but all four panelists said that is rare. But the option for related entities to buy assets under the care of special servicers raised several questions from audience members over inside dealing or unfair advantages. C-III has 800 assets and has only purchased about five REOs, said Jenna Vick Unell, director and associate general counsel at C-III Asset Management. She said such affiliated deals go through an extra layer of approval via the trust when a special servicer is the winning bidder. LNR’s Nealon said it has purchased only two REOs in the past 17 years. As of September, $618 CMBS were outstanding with 9.63% delinquent by 60 days or more. Of that 13% or 4,400 CMBS real estate loans are in special servicing, equaling a loan balance of $82 billion, according to statistics provided by attorney firm Ballard Spahr. Fitch Ratings said cumulative CMBS defaults hit 12.4% in the third quarter. To date, CMBS defaults are half of what they were for the entire year of 2010, suggesting the rate is slowing down, according to Fitch. Office properties represent 29% of specially serviced CMBS, up nearly 17% since 2009. A significant amount of the underlying collateral is in the New York area (24%) with the Deep South also holding a significant amount (23%). CMBS is benefiting from tighter spreads, according to a note put out Friday by Trepp. On Thursday, spreads on super seniors fell 20 to 35 basis points. In August, Trepp, said only about 40% of CMBS loans managed to pay off on their scheduled balloon dates in July, down from 42.4% in June. Stacy Berger, executive vice president at Midland Loan Services, said the mandate for special servicers is pretty simple: “It’s to resolve assets.” Special servicers typically do their own valuations of the property and the borrower and sit down to discuss resolution options. Once the controlling class approves, the plan is implemented. Loans are not landing with special servicers by surprise. Some come in before default if problems are identified. An example would be a large office complex or retail center that loses a major tenant. Disposition of problem loans typically takes about 18 months, panelists said. Write to Kerry Curry. Follow her on Twitter @communicatorKLC.