The Real Deal Miami

Investors purchase loan servicers to profit off underwater commercial mortgages

April 26, 2011 12:45PM

Sixty billion dollars in commercial mortgage-backed securities will mature by the end of 2012, and investors are seeking to profit off the boom-year loans, which are largely underwater. According to the Wall Street Journal, one way they’re doing so is through buying loan servicers, or middlemen on troubled commercial mortgages. That allows the investors first dibs on distressed properties when they hit auctions because their loans defaulted. Andrew Farkas is one of the leading employers of this tactic — along with Fortress Investment Group, Cerberus Capital Management and Vornado Realty Trust — which has drawn controversy because of a possible conflict of interest. The loan services are supposed to represent the bondholders’ interests, but Farkas has stated his intentions to purchase many of the distressed properties as inexpensively as possible. Farkas, the chairman and CEO of Island Capital Group, is trying to raise $250 million for investment in distressed real estate. The strategy figures to catch on as assets controlled by loan servicers has soared from $6 billion in March 2008 to $87 billion in March 2011, according to Trepp research cited by the Journal. [WSJ]