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The Interplay of a CMBS Spike and a Litigation Slow-Down


| By Dr. Charles D. Cowan, CEO & Co-Managing Member of IMS | Analytic Focus & Teresa Barber, Former IMS Director of Industry Relations

There is no question that the COVID-19 pandemic has caused ripple effects throughout all stripes of industries and markets, and particular disruption for the litigation community. As the impacts of pandemic-related disruptions and new trends in consumer behavior take shape, litigators and in-house counsel have many areas to watch and trends to monitor as they navigate new areas of risk. Several factors may make advancing cases and projects difficult, especially during a spike in disputes, due to slow-downs and disruption.

Statistical applications and economics investigations expert Dr. Charles Cowan, chief executive officer and co-managing member of Analytic Focus, has been closely monitoring how the pandemic has affected litigation. He has simultaneously observing trends in sectors, including commercial mortgage-backed securities (CMBS).

Dr. Cowan and his colleagues handle a number of CMBS matters. He notes that this is a market that has been uniquely impacted by COVID-19. Across national and local headlines, we see stories of renters in multifamily homes and small business owners who are having difficulty paying their rent on time amid restrictions on business hours, in-office work, and shifts in customer demand. On the other side of the equation are property owners who still must service their outstanding debt, yet they are not getting commensurate forbearance.

At the same time the CMBS matters progress, Dr. Cowan’s firm has seen significant demand for underwriters for new commercial loans and annual reviews of existing loans. He notes that many firms may not have the resources needed long-term to weather the loans coming due.

As a result of this birds-eye view into lending processes, Dr. Cowan is predicting a large increase in defaults and failures of CMBS starting roughly in the second or third quarter of this year. And should a crash of the CMBS market come into play, he anticipates a spike in litigation that parallels the 2008 housing crisis and RMBS fallout.

Society as a whole, and the litigation community in particular, are dealing with a new set of challenges from pandemic-induced disruption and slow-downs. Add to this the uncertainty of the passage of Federal programs, the distribution of Federal monies at the state level, and the timing of recoveries in different markets. 

In past years, nearly everybody was working in an office where each and every resource they needed was readily accessible. Today, we live in a world where many people are working entirely from their homes. In fact, several Big Tech corporations and other large companies have announced their workforces may remain remote indefinitely. While continuity may remain seamless in some sectors and industries, in others we have seen an increase in latency, including almost everything related to litigation.

Dr. Cowan notes slow-downs in every step of the litigation process, starting with the ability to obtain primary data from governmental agencies, even in litigation that is not CMBS related. He observes that this slow-down is not surprising, with so many people and agencies still working remotely or on staggered schedules.

“As an example, if one wants to obtain data from a government agency at nearly any level, the approvals to receive (access to) the database take longer as paperwork circulates more slowly,” says Dr. Cowan. “Resources to extract and construct the data are more difficult for the agency staff to access. Documentation and queries to discover what is in the data are slowed, as this requires more internal coordination.”

In addition to slower data access at the start of a project, the largely-remote structure of “the new normal” attenuates the timing for subsequent steps in the process. When communications within an organization are slow or even nonexistent, that causes an unfortunate snowballing effect, he says. As a result, the time it takes to complete a project, as well as the completeness of the materials, can suffer.

However, Dr. Cowan notes, this should not lead us to cast aspersions on any agency. Nearly all organizations – including government agencies, law firms, and corporations – rely heavily on communication and access to information and materials. Right now, so many organizations have been hit hard as they have been forced to adjust on the fly. Given the nature of litigation – a part of the legal world that relies heavily on communication and access to materials – there has been a rather sizable impact.

With litigation already facing bottlenecks from delayed or paused cases, we may see a legal system that becomes even more overwhelmed for all types of litigation. Should Dr. Cowan’s predictions for a spike in CMBS-related litigation come to fruition, this could be especially true. With the COVID-19 vaccine rolling out throughout the U.S., the country appears to be rounding the turn against the pandemic. Several major cities have reduced or even eliminated restrictions and companies who have called employees back to work, whether in a modified office space or through staggered scheduling. There are still others who have been able to seamlessly adapt traditionally in-person processes for continuity in the remote environment, and others launching new innovative lines to meet a burgeoning generation of demand bred by this “new normal.” Despite these steps forward, the question still lingers: What will litigation look like in a post-pandemic world?

Dr. Cowan believes the litigation slow-down experienced in 2020 may remain with us for the foreseeable future. “Post-pandemic,” he says, “as organizations realize savings in housing staff and materials and as people realize the freedom of working at home, the latency is likely to be baked into the process for a long time.” For HR directors in firms at all levels, the computation is the trade-off between savings in terms of overhead versus concomitant losses in productivity when people are not together. For developers and property managers, the losses may continue to mount, even it unemployment falls to pre-pandemic levels.

Litigators will be wise to closely monitor trends in industries relevant to their practice areas and take special steps to prepare for a choppier-than-usual season ahead.

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