Special Servicers are Trying to Flatten the Curve

If you’re an investor expecting to buy troubled assets through servicing, you’re probably going to have to wait a while, according to Michael T. Fay, principal, managing director and global head of Avison Young’s asset resolution team.

“The special servicers are going to take a while,” Fay says. “It’s going to take a least two years to work through that. The special servicers today, in my opinion, are trying to flatten their own curve.”

Right now, servicers are looking out 12 to 18 months as they try to figure out a path forward, according to Fay.

But they are already getting an influx of assets from some sectors. Fay estimates there were 50 or 60 hotels in servicing before the pandemic. Now there are more than 600, he says.

“That is a tenfold increase in a period of 120 days,” Fay says. 

Hospitality won’t be the only sector that feels pain. “What is going to be interesting is what happens to multifamily with the expiration of the unemployment money that was coming out from the stimulus packages,” he says 

Banks are dealing with their own stresses right now, as many borrowers seek deferrals or new agreements. With the CARES Act, the Federal government relaxed the requirements on what banks had to keep in reserve against loans. “That allowed banks to make decisions to postpone payments, forbearance agreements and things of that nature,” Fay says.

Eventually, Fay thinks banks will eventually start selling their troubled loans.

“I think you’re going to see a lot of loan sales from the banks, and they’re going to push those loans off to other non-bank investor groups and let them deal with the problem,” Fay says. “That means they don’t have to have reserves for capital, and they don’t have to classify the loan.” 

A big part of what banks decide to do will depend on what action the government takes. “I think we’ll start to see more activity and action in the first quarter next year,” Fay says.

Fay, who used to work in banking, says that banks, like servicers, are also taking stock of the current situation. “The banks have got issues,” he says. “When they have capital flows that are having problems, they have to reserve against them and then classify them with the CARES Act right now.”

When that happens, funds will be able to buy a loan or a pool of loans at a discount, according to Fay. Fay sees problems eventually bubbling up in many sectors. “There are a lot of levels of opportunity,” he says.