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Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special-Serviced CMBS Loans

Jun Chen and Yongheng Deng
During and after the crash of the commercial real estate market in the late 1980s and early 1990s, commercial mortgage default rates across the country were extremely high. Anecdotal evidence indicates that, since then, lenders have become much more cautious with these loans, tightening underwriting standards and stepping up servicing efforts. In addition, as these loans have been increasingly securitized, investors in commercial mortgage-backed securities (CMBS) now monitor the default risk and impose various requirements to limit default probabilities and potential loan losses. One such measure is to transfer a problem loan to a special servicer, because of his special expertise in handling these situations.