In what context does special servicing arise? As alluded to above, once a loan becomes non-performing, “the master servicer sends the loan to a special servicer.” There, and under the terms set forth through a Pooling and Servicing Agreement (PSA), the “special servicer has wide latitude to foreclose on the loan or modify the loan terms in an effort to maximize the cash flows to the CMBS investors.” In theory, the decision among special servicers–whether it includes writing down the principal, accepting discounted payoffs, selling the note or even foreclosing on the property and selling the subsequent real estate owned–is aligned with the collective interest of CMBS investors.

And in fact, attempts have been made to support this theory in practice. The U.S. Treasury has issued guidance concerning REMIC rules, which have strengthened servicers' relative position. One particularly striking aspect of the guidelines is the ability to not only institute a sale, but also participate as an active bidder (and obviously, as a successful purchaser). While some controls are in place, such as requiring the purchase price to represent “fair market value”, for me, there still seems to exist the “incentive for servicers to try to grab properties at a discount, or to not aggressively market properties they want to buy.” On the other hand, some have downplayed the probability of this type of action given the apparent legal exposure it presents. Is this a clear conflict of interest? Should even the possibility of impropriety–however small–be enough to end this practice? Or should we allow this to play out and let bondholders make the final determination?