Missing Documents Could Haunt CMBS Market in Economic Downturn

The CMBS market is stable now. Two years ago, the Russian default crisis was a factor in a chain of events that put significant pressure on hedge funds and resulted in a fire sale of these securities.

But there may be trouble again for this sector if the real estate market or the economy starts to soften. The concern is over the loss of documentation–a problem that has already affected some $1 billion in transactions, one source tells GlobeSt.com: “One of the critical parts of a CMBS is the transfer and recording of documentation representing the transfer of the ownership of the mortgages,” says Brian Lancaster, a managing director in locall based Bear Stearns’ Financial Analytics and Structured Transaction Group. A whole series of documents have to be recorded by municipalities. They are sent out, but often don’t come back for a year or more.

“Meanwhile, the deal has to progress,” he says. “Lawyers can issue variants of documents in lieu of the originals, which is sufficient to the have deal done,” he adds. There is no problem as long as the borrower makes payments on the loan. But if a default occurs, and the special servicer has to foreclose, “it can make life much more difficult for him and potentially much more expensive. And it can make the loss potentially greater than it would otherwise be” Lancaster says. He is the author of a 13-pg. report issued by Bear Stearns, Missing CMBS Documents: A Wake Up Call.