The decision to foreclose on a CMBS mortgage is made by the special servicer. A loan is in special servicing when the mortgage is either delinquent or in a state of imminent default. The special servicer should represent the interests of the underlying CMBS bondholders by getting the most dollars back for the investors. In this paper, we show that the special servicer's compensation structure results in an incentive for him to extend the loan beyond the time desired by the bondholders. We develop a model of these conflicting incentives and demonstrate how compensation incentives interact and influence the special servicer's foreclosure decision. Our model takes into consideration the dynamic nature of this decision by viewing the foreclosure decision as a dynamic programming problem whereby foreclosure represents a discrete terminal state of an optimal stopping problem. This model thus captures the trade-off between continuation of the loan with its termination and we use this model to determine how the stopping rule changes under various compensation structures.
Liu, P., & Quan, D. (2010). Foreclosure of securitized commercial mortgage - a model of the special servicer [Electronic article]. The Center for Real Estate and Finance Working Paper Series, 2011-005, 1-18.