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The steep reduction in the balance of U.S. commercial mortgage-backed securities (CMBS) loans in special servicing is encouraging, but this trend may intensify some of the conflicts of interest that impact special servicers, according to new research released by Fitch Ratings.

Fitch Ratings' data has determined that CMBS loans in special servicing dropped by almost $6 billion to $74.8 billion at the end of the third quarter. This balance peaked in 2010 at $91.7 billion. Over the past year, the average number of assets per asset manager has declined from 20 to 12.

However, Fitch Ratings warns that these trends may create more problems than solutions for the special servicers assigned to CMBS loans.

"The relative scarcity of specially serviced loans is increasing competition between servicers and may make the conflicts of interest that they must manage more important," says Fitch Ratings. "Investors are concerned that the special servicer agrees to resolution terms that are in their own best interest - or that of a related entity or brokerage - rather than protecting the interests of all bondholders. Increased competition for troubled assets, either for fee generation or ultimate control of the real estate, will further intensify investor concern as special servicers compete for controlling classholder rights.

"In our view," Fitch Ratings adds, "the trend toward a smaller specially serviced loan pool may be difficult to maintain over the longer run. The large volume of maturities that will begin in 2015 and run through late 2017 are difficult to predict amid uncertain interest rate trends and the current delicate recovery in the business cycle."


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