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Hedge-fund giant Farallon Capital Management LLC is restructuring more than $1.5 billion in debt stemming from a big bet on trailer parks, one of the largest attempted workouts involving commercial-property loans sliced and sold to investors in the boom years.

The $1.5 billion securitized loan backing Farallon’s 2007 purchase of a business operating about 270 mobile-home communities on Friday was placed with a debt-servicing company that deals with troubled loans, according to a spokeswoman for trailer-park operator.

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Vornado Realty Trust, which lost to Cerberus in a bidding battle for LNR in 2004, is poised to get a stake in LNR along with other creditors as part of efforts by Cerberus to restructure the real-estate company’s debt, according to credit-rater reports and people familiar with the situation.

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In 2007, at the height of the commercial real-estate boom, Credit Suisse Group packaged 250 mortgages into bonds and sold them to investors in a $3.3 billion issue of commercial-mo rtgage-backed securities.

That CMBS issue has now achieved a dubious distinction: The deal is expected to see a 15% loss, the highest potential loss for any 2007 CMBS issue, according to Fitch Ratings. Overall, the projected loss rate on all CMBS issued that year in the U.S. is about 10%, Fitch said.

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Nearly 5,000 loans in special servicing rapidly increased workload and staff.

“Special servicers are now engaging in bulk note sales, modifications into A/B notes and forbearance,” said Stephanie Petosa, managing director at Fitch. “However, the majority of the loan workouts remain within the more traditional realm of extensions, modifications and foreclosures.” 

Fitch said it expects to complete annual ratings reviews on four of five most active special servicers by the end of this month, and the ratings agency plans to provide a more in-depth overview of current and emerging CMBS special servicing trends in its quarterly report later this month.

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Up until recently, lenders and special servicers have done little to deal with the mounting volume of distressed mortgages in CMBS pools because it is so difficult to get all interested parties on the same page. But now the sheer volume of distress is forcing their hand.

In March, the unpaid balance on CMBS loans transferred to special servicing reached a trailing 12-month high of $79.83 billion, of which retail loans accounted for about 25 percent of that total, according to Realpoint LLC, a Horsham, Pa.-based credit rating agency.

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Up until recently, lenders and special servicers have done little to deal with the mounting volume of distressed mortgages in CMBS pools because it is so difficult to get all interested parties on the same page. But now the sheer volume of distress is forcing their hand.

In March, the unpaid balance on CMBS loans transferred to special servicing reached a trailing 12-month high of $79.83 billion, of which retail loans accounted for about 25 percent of that total, according to Realpoint LLC, a Horsham, Pa.-based credit rating agency.

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The New Jersey-based company led a group that in 2007 paid $33.5 million for the 103-year-old property, which was once the largest peach cannery in the world.

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Defaults on commercial mortgages bundled into securities are climbing to records, threatening bondholders with steeper losses and putting pressure on property owners and lenders to restructure their loans.

According to Fitch Ratings, more than 11% of some $536 billion of loans packaged into commercial-mortgage-backed securities are expected to be at least 60 days past due by year’s end. The late-payment rate now is about 7% and has skyrocketed in the past year because of squeezed rent payments, making it hard for property owners to continue servicing their debt and the near-paralyzed market for new commercial-mortgage-backed securities, which is making it impossible to refinance some debt as it comes due.  READ FULL STORY