Special Servicing

Definition

Special Servicing is a sector within a lender’s management organization specifically assigned to handle loans that are either in default or at high risk of default. This department comprises experts who focus on various methods to collect overdue payments and restructure troubled loans to mitigate losses and facilitate the return of the loans to a performing status.

Examples

Example 1: An office building mortgage is three months delinquent on payments. The regular servicing team transfers the loan to the special servicing department. The special servicing team negotiates a loan modification with the borrower, allowing for temporary reduced payments until the borrower can catch up.
Example 2: A multifamily rental property is facing foreclosure due to non-payment. Special servicing steps in and arranges a forbearance agreement which halts the foreclosure process and gives the borrower time to improve their financial situation.
Example 3: A commercial borrower faces significant hardship and misses several loan payments. Special servicers initiate a deed-in-lieu of foreclosure, where the borrower surrenders the property to the lender to forgive the remaining debt.

Frequently Asked Questions (FAQs)

What distinguishes special servicing from regular servicing?

Special servicing is specifically focused on handling delinquent or high-risk loans, whereas regular servicing involves routine management of current and performing loans.

When is a loan transferred to special servicing?

A loan is typically transferred to special servicing when it becomes delinquent, or there are significant concerns about the borrower’s ability to continue making payments as agreed.

What are common strategies used by special servicers?

Common strategies include loan modification, forbearance agreements, short sales, deed-in-lieu of foreclosure, and in some cases, foreclosure proceedings.

What qualifies someone to work in special servicing?

Professionals in special servicing often have backgrounds in finance, law, and real estate with specific expertise in managing distressed assets and negotiating complex financial and legal restructurings.

Is special servicing only for commercial loans?

No, special servicing can apply to both commercial and residential loans that are delinquent or at risk of default.

Loan Modification

A change made to the terms of an existing loan by the lender, typically to assist a borrower who is unable to meet the original terms.

Foreclosure

The legal process by which a lender takes possession of a property used as collateral for a loan that has defaulted.

Forbearance Agreement

An arrangement between lender and borrower where the lender agrees to temporarily reduce or suspend mortgage payments.

Deed-in-Lieu of Foreclosure

A transaction in which the borrower voluntarily transfers the property’s title to the lender to avoid foreclosure.

Online Resources

References

“Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques” by Frank J. Fabozzi
“Handbook of Mortgage-Backed Securities” by Frank J. Fabozzi

Suggested Books for Further Studies

“Distressed Debt Analysis: Strategies for Speculative Investors” by Stephen Moyer
“Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
“The Complete Guide to Real Estate Finance for Investment Properties” by Steve Berges

Real Estate Basics: Special Servicing Fundamentals Quiz

### When is a loan typically transferred to special servicing? - [x] When it becomes delinquent or shows signs of potential default. - [ ] At the borrower's request at any time. - [ ] Only at the end of the loan term. - [ ] Upon the initial signing of the mortgage agreement. > **Explanation:** Loans are typically transferred to special servicing when they become delinquent or there are significant concerns about the borrower’s ability to continue making payments. ### What is a common tool used by special servicers to help borrowers? - [ ] Selling the loan to another servicer. - [x] Loan modification. - [ ] Immediate foreclosure. - [ ] Increasing the interest rate. > **Explanation:** One common tool is loan modification, which involves changing the terms of the loan to help the borrower manage their payments. ### What background do special servicers generally have? - [x] Finance, law, and real estate. - [ ] Graphic design and marketing. - [ ] Construction and engineering. - [ ] Medicine and healthcare. > **Explanation:** Special servicers usually have expertise in finance, law, and real estate, essential for managing distressed assets and negotiating loan modifications. ### What is the primary goal of special servicing? - [ ] To sell the mortgaged property immediately. - [ ] To increase the loan interest rate to generate more income. - [ ] To securitize the loan. - [x] To mitigate losses and get the loan performing again. > **Explanation:** The primary goal of special servicing is to mitigate losses and return the delinquent loan to performing status. ### Can special servicing apply to residential loans? - [x] Yes. - [ ] No, it is only for commercial loans. - [ ] Only for government-backed loans. - [ ] Only for private loans. > **Explanation:** Special servicing can apply to both commercial and residential loans that are delinquent or in danger of default. ### Which of these is NOT a strategy used by special servicers? - [ ] Loan modification. - [ ] Forbearance agreement. - [ ] Deed-in-lieu of foreclosure. - [x] Property appraisal. > **Explanation:** Property appraisal is not a strategy used by special servicers; rather, it’s a process conducted to assess property value. ### What happens in a deed-in-lieu of foreclosure? - [ ] The borrower makes reduced payments temporarily. - [x] The borrower transfers the property's title to the lender. - [ ] The lender forecloses on the property. - [ ] The lender disregards the missed payments. > **Explanation:** In a deed-in-lieu of foreclosure, the borrower transfers the property’s title to the lender to avoid foreclosure. ### Who might special servicers collaborate with to manage distressed loans? - [x] Legal professionals. - [ ] Personal trainers. - [ ] Environmental consultants. - [ ] Fashion designers. > **Explanation:** Special servicers often collaborate with legal professionals to manage and restructure distressed loans. ### What is the purpose of a forbearance agreement? - [ ] To change the interest rate of the loan. - [ ] To hand over property ownership to the borrower without payment. - [x] To temporarily reduce or suspend mortgage payments. - [ ] To increase the loan amount. > **Explanation:** A forbearance agreement is designed to temporarily reduce or suspend mortgage payments, assisting the borrower during financial difficulty. ### Which department deals with high-risk or delinquent loans? - [ ] Underwriting department. - [ ] Property management department. - [x] Special servicing department. - [ ] Customer service department. > **Explanation:** The special servicing department is responsible for handling high-risk or delinquent loans.