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Maximize total expected return

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Consider a single-loan CMBS deal of size $1bn, with a B-piece of $100m. The loan has become delinquent and been transferred to special servicing. Expected losses are $150m if the property is foreclosed on. If the loan is restructured, there is a 30% chance the borrower will start performing, reducing losses to zero, but a 70% chance that final losses will rise to $300m.

A. What should the CMBS investors do to maximize total expected return?

B. If the special servicer wants to maximize their own short-term interests, what should they do? Why?

C. Why might the CMBS market features a key role for B-piece investors, but the RMBS market does not?

Reference no: EM133111165

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