S&P Global Ratings recently surveyed its ranked U.S. commercial mortgage servicers, all of whom have indicated they have successfully deployed their disaster recovery and business continuity plans in response to the COVID-19 pandemic. We view this industrywide accomplishment positively, although we recognize that all commercial mortgage servicers are now drinking from the proverbial firehose. While we are not taking any coronavirus-related ranking actions at this time amongst the U.S. commercial mortgage servicers' we rank, we believe significant operating challenges and bottlenecks lie ahead that will place strains on servicers' resources, including:

• Massive requests for forbearance or other forms of borrower relief;
• Increase in servicer advancing requirements; and
• Acceleration of delinquencies and defaults.

We discuss each of these concerns and how servicers are preparing for them below.

Massive Requests For Forbearance Or Other Forms Of Borrower Relief

We expect all servicers will need to take a triaged approach in responding to an accelerating number of borrower requests. With the pandemic catching everyone by surprise, it is unlikely any of them planned for a massive influx in borrower request activity over such a compressed time frame, particularly following an extended period of expanding economic prosperity. Borrowers faced with payment difficulties following the onset of the pandemic are likely to span all property types across the U.S. From our conversations with market participants, lodging and retail appear to be property types requesting the most relief in the private-label commercial mortgage-backed securities (CMBS) market at this time. This is unsurprising since many hotels and retail stores have faced temporary forced closure due to shelter-in-place orders and other major restrictions on travel.

Despite this worsening situation, we have observed the CMBS servicing community continuing to work collaboratively with open communications among master and special servicers related to these borrower-relief requests. Furthermore, the Commercial Real Estate Finance Council trade organization published "A CMBS Borrower's Quick Guide for Communicating with Your Servicer in Cases of Need," on March 31, 2020, a resource to help borrowers open the line of communication with their servicers and to maintain transparency regarding interruptions to cash flow as a result of COVID-19.

Nonetheless, the idiosyncratic nature of the CMBS market presents unique challenges to effect borrower relief, which may be exacerbated because CMBS transaction documents are not always consistently interpreted and investor interests may not be aligned. As a result, we expect the majority of these borrower requests will require careful and case-by-case review by servicers. While a standard forbearance agreement similar to the ones offered by the government-sponsored enterprises (GSEs) may be suitable in many instances (see below), we nonetheless anticipate the need for more varied solutions across servicers and property types will be required.

For servicers who focus on GSE product, Fannie Mae and Freddie Mac have each offered their own coronavirus forbearance program to borrowers that are modeled off other successful natural disaster relief programs they have recently provided, including for hurricanes and wildfires. Their standardization of these forbearance agreements should somewhat alleviate the challenges that exist in the private-label CMBS market, where specific pooling and servicing agreements (PSAs) govern servicer behavior, although these documents are not always clear. Nonetheless, the potential massive and national scale of the GSE forbearance programs far exceed what servicers have dealt with during prior regional disasters.

To the extent possible, we believe servicers will try to execute forbearance arrangements without a transfer to a special servicer and thus avoid additional fees to investors. For example, we are aware of one CMBS servicer who is attempting to take a programmatic approach across its portfolio in a fashion similar to the GSE forbearance agreement. However, in many cases, that may prove to be impractical, and our communications with servicers suggest that many forms of requested relief will require loans to ultimately be transferred to a special servicer, to among other factors, comply with REMIC rules.

To that end, in our discussions with another CMBS special servicer, we learned that it has prepared standard forbearance agreements for borrowers that are unable to pay their mortgage due to the pandemic. While some individual special servicers may be able to accomplish this to some degree, such a uniform approach would be unprecedented for the CMBS industry as a whole as each situation is different and varied remedies may be necessary.

Increase In Servicer Advancing Requirements

Within the CMBS market and Freddie Mac K-deal, the three major master servicers will face an increase in advancing requirements with an anticipated acceleration in the volume of loans receiving forbearance of principal and interest payments. These large servicers, Wells Fargo Commercial Mortgage Servicing, Midland Loan Services, and Keybank Real Estate Capital, are either divisions or subsidiaries of Wells Fargo (see "Wells Fargo & Co.," published Oct. 29, 2019), PNC (see "The PNC Financial Services Group Inc.," published Dec. 17, 2019), and KeyCorp (see "KeyCorp," published Aug. 9, 2019), respectively, all of which are well-capitalized banks. In addition, all three of these servicing institutions maintain strong policies and tight control regarding advancing decisions, and all successfully navigated their advancing responsibilities during the Great Recession. We do note, however, that CMBS "2.0" is now awash in an abundance of pari passu loans scattered in many single-asset/single-borrower (SASB) and conduit deals, which adds the potential for an additional layer of complexity in advancing and may require extra coordination among servicers to determine who is the responsible party. We believe that the A-1 controlling note certificate servicer, typically in the SASB deal or initial conduit transaction, would be in the driving seat for advancing decisions.

Alternatively, Fannie Mae's delegated underwriting servicers (DUS), some of which may not be as well capitalized as the aforementioned master servicers, are typically required to advance unpaid principal and interest payments to investors. However, at present, it is unclear if the DUS servicers will remain obligated to advance for those loans subject to the COVID-19 forbearance relief program. To the extent that external liquidity from Fannie Mae or another government-supported program does not become available to aid DUS servicers, we expect some of these servicers may face a liquidity challenge.

Acceleration Of Delinquencies And Defaults

While forbearance may work for borrowers in the short run, with more than 10 million Americans newly unemployed and the U.S. economy in recession (see "It's Game Over For The Record U.S. Run; The Timing Of A Restart Remains Uncertain," published March 27, 2020), the default rate will certainly accelerate significantly in the near term. We have observed that many special servicers downsized their special servicing staff during 2019 in concert with significant resolution activity and shrinking portfolios remaining to be resolved. We also note that there are new entrants to the special servicing industry, which, while staffed with industry veterans, have not had their platforms tested yet. Furthermore, we are aware of controlling class certificateholders in certain SASB CMBS transactions seeking to replace the special servicers existing in these transactions, often with their own special servicing affiliates, many of which operate ranked servicers that have not been active in the CMBS market in recent years.

We believe that all servicers will need to add and/or redeploy resources to manage an increased workload for at least the next several months and likely longer, as it may take time to work out many of these problem loans. With many companies currently operating primarily or even completely away from their primary offices, this will be an increased challenge to successfully interview, hire, and onboard qualified personnel. It may also be difficult to find sufficient available resources, as all active servicers are likely to be increasing their staffing. Further, management, oversight, and training of newly hired staff working from a remote location, particularly if done in volume, poses even greater challenges.

For loans that face credit issues that are not solvable via forbearance and are transferred to the special servicer due to imminent default, or those that reach a 60-day delinquency trigger, we expect social distancing measures, if still in effect, will present challenges for properties to be inspected appropriately and/or from appraisals being conducted. Each of these services are typically required to be performed by special servicers (or their vendors) within defined time periods under PSAs and before completing any loan modification.

Notwithstanding the challenges of performing these services in a timely manner, an appraiser's ability to value commercial real estate in the new market environment is a potential industry concern that existed during the Great Recession, particularly since valuations underpin advancing and modification decisions.

S&P Global Ratings Research

• It's Game Over For The Record U.S. Run; The Timing Of A Restart Remains Uncertain, March 27, 2020
• The PNC Financial Services Group Inc., Dec. 17, 2019
• Wells Fargo & Co., Oct. 29, 2019
• KeyCorp, Aug. 9, 2019

Other Research

• A CMBS Borrower's Quick Guide for Communicating with Your Servicer in Cases of Need. crefc.org, March 31, 2020, http://cmbs.informz.net/z/cjUucD9taT03ODcwMjU4JnA9MSZ1PTg0MzE1MzQ3OSZsaT02NDQyNzExOQ/index.html)