Trepp managing director Manus Clancy explains that even though things looked good in the first half of the year, there's just too much coming in. "For the first three years of the recession, there was a bathtub filling up with the loans going into default," he says. And it was filling monthly with billions of dollars of loans pouring in. The drain wasn't working properly because no one was used to the resolution process, he says.

"Today, the stopper has been pulled, but the loans are still pouring in the top," Clancy says. "There's some going out, but the water is level. Special servicers ramped up staffing, and there's a lot more confidence about where valuations are supposed to be."

Andrew Wright, CEO of Tampa, FL-based Franklin Street Financial Partners, tells DAI that lenders are faster and better at dealing with distress. "When it started in 2006 and '07, we didn't know how to get it done," Wright says. "I've now completed 100 resolutions, modifications and note sales. We're getting better at identifying the outcomes."

Ed Indvik, Los Angeles-based vice chairman at Lee & Associates, tells DAI that the banks finally got their organizational charts organized, basically setting up for the default and workout process and who is responsible for what. Lenders have become more realistic about the values of the assets they have, he says. "Now, you're seeing a lot less accommodations for borrowers," Indvik says. "As the industry was extending and pretending, for every loan liquidated there was an accommodation. Now we're up to about six liquidated to one accommodated."

William O'Connor, a partner and chairman of the financial services practice at Crowell & Moring in New York City, tells DAI that now it's the special servicers' turn to get out from under the pile. They have an overload that they can't handle with current manpower and are really pressed with the work that's going out to them, he says.

Plus, the servicers are merging with each other, complicating matters. For example, New York City-based C-III Capital Partners took over JER Partners' special servicing division in late August, potentially rebooting or slow the process down, O'Connor says. As of August, C-III is now the named special servicer for approximately 14,000 loans with an aggregate balance in excess of $152 billion, of which approximately $17 billion is currently in special servicing.

"These mergers are going on a lot, though there are proposals to stop this," O'Connor says. "I can't tell you how many borrowers I've dealt with that were down the road with a resolution, and a new servicer came in and took a totally different tack."

Hambly says it's also a misconception that the note buying that's been going on helps resolve the default crisis. "There's the belief that these $200 million or $1 billion in note sales is flushing the distress out of the system," she says. "However, the problem then just shifts to the entity that bought the note." She says that, from a borrower's standpoint, a note sale is a great thing; it can try to buy its own note and will likely pay 50 cents on the dollar. "They likely have someone new to work with, but the CMBS investor just got screwed," Hambly says.

Also, Indvik says that CMBS, which is involved in a large chunk of the future workout problem, is by nature a difficult financial arrangement to maneuver through. "You have to get everybody's cooperation, with all the different bond holders, and each one has its own interests," he says. "It's like herding cats. These servicers are already overworked, and it's going to be a slow process to get the CMBS worked out."

Sandy Monaghan, managing director of the Capital Markets Group and national practice leader of the Resolution Group at New York City-based Cushman & Wakefield Inc., points out that people forget that, while core markets have recovered to one extent or another, not so much the rest of the country. "It's amazing how quickly investors began to look outside core markets to chase yield," he says. "However, with the recent challenges faced by CMBS, coupled with the European debt crisis and austerity measures, the rumblings of a slow recovery have grown quiet."

Peak loan maturities are expected to occur in 2013, Monaghan says, with the largest amount of maturity defaults and other distress that is going to occur through 2013 yet to come. Also, the 10-year CMBS maturities of the 2005- 07 vintage have a high probability of adding to the distress by 2015.

"What exactly will happen, however, is just too early to predict," says Monaghan, a member of DAI's Editorial Advisory Board. "If fundamentals improve before 2015 then a lot of the loans could be bailed out in refinancing, but in the near term, the maturities are going to continue to suffer from high loan-to-value levels, likely through 2013."

Indvik says he believes the pipeline will eventually be cleaned out, due to classic supply/demand principles. There's very little new product being built, and there's more recognition that the majority of distressed assets are devalued. Indvik says an incentive for a new buyer is that, because it can get the property at a discount, it can then offer rent significantly less than the previous owner and will thus have a better chance of attracting tenants. Clancy agrees that there's a good chance the distress could be worked out by the end of the decade. "More important is how the broader economy reacts," he says. "If we continue to see near-double-digit unemployment, and the world economy stays down, we'll see this pipeline continue to fill for the next few years. However, if the market gets some confidence, I don't think it would take more than four, certainly no longer than seven years before we're out of this."

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