Special Servicer Starts Releasing Worrisome CMBS Holdback

A 2021 mortgage-backed bond deal got some worried attention in March of 2024 in the form of a $164 million holdback by special servicer Midland Loan Services. Now $105 million has been released, according to KBRA, which has withdrawn all its previous ratings “due to a lack of sufficient and ongoing information to maintain the ratings.”

The backstory: Goldman Sachs Group put together a mortgage-backed bond deal in 2021. The money went to a group purchasing 61 multifamily properties with a total of 1,719 rent-controlled units in San Francisco. The floating-rate, interest-only, first lien mortgage loan had an initial balance of $674.8 million.

By the end of 2022, the borrowers defaulted. The loan was sold off at a deep discount. Then came the rest of the bad news. Special servicer Midland Loan Services told the investors of a holdback of $164 million.

Holdbacks happen on occasion in CMBS financing, but this was big. As Bloomberg noted at the time, it exposed multiple classes that had been rated as investment grade by Kroll Bond Rating Agency to potential loss and has raised fears among some investors that servicers will make surprise decisions that affect their returns in deals.

The collapse of a highly-rated mortgage-backed bond might bring up memories of the Global Financial Crisis in which many bonds backed by residential mortgages with strong ratings were found to be less than what they appeared. This has reportedly spooked Wall Street and investors.

“On April 26, 2024, a revised January 2024 remittance statement was posted by the trustee, resulting in the special servicer’s release of $105 million of the holdback, of which the collateral trust received $39.5 million,” KBRA wrote. “This resulted in the full payoff of the Class C and D certificates. The remaining holdback amount is approximately $59 million. The funds remain an asset of the trust, however, if, when, and how much of the remaining holdback might become available for certificate holders is unknown at this time.”

Midland’s corporate parent, PNC Financial Services Group, said in a statement that the money “was initially retained because of issues raised by subordinate noteholders about the sale of the loan,” according to Bloomberg.

And KBRA wrote that the “special servicer indicated that the holdback was effectuated to cover potential litigation expenses and judgements that might be incurred by the trust as there were some investors that disagreed with the resolution taken by the special servicer and resulting loss.”

It all still leaves about $59 million still being held back and there are “unanswered questions,” Stav Gaon, a strategist at Academy Securities, told Bloomberg.