No Recovery Expected for Hope Notes in U.S. CMBS Market

According to a recent article in Business Wire, the recovery in many subsectors of the U.S. CMBS market will bolster efforts to modify legacy commercial loans, but recoveries from “hope notes” are not expected as their structures do not provide sufficient incentive for their borrowers to repay. According to the article, “[h]ope notes divide one loan into an A note, which pays interest, and a B note, which generally accrues interest until a capital event occurs.”

Hope notes reached a peak of $3.5 billion in 2011, followed by $2.7 billion in 2012 and 2013 before volume fell in 2014. According to Fitch, “the dispositions of hope notes take approximately 3.5 years on average from the time the loan transfers to a special servicer to the ultimate disposition date.”

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