Improve CMBS Servicing Quality? Change the Business Model

CRE Finance World, Autumn 2012

Improve CMBS Servicing Quality? PNC Real Estate/Stacey BergerExecutive Vice President Change the Business Model Midland Loan Services T lenders offer mortgage loans, their borrowers know who market. The return of strong CMBS issuance volumes is dependentshare of new commercial mortgage origination. The availability ofattractive debt financing is a prerequisite to the recovery of theoverall commercial real estate market. CMBS has historically beenan important component of the commercial mortgage financehe allocation of servicing in commercial mortgage-backedsecurity (CMBS) transactions is unique and differentfrom most other forms of commercial mortgage finance.When banks, insurance companies or multifamily agency their servicer will be. In a highly competitive finance market, borrowers on competitive loan terms and pricing to attract quality borrowers, can select the loan that offers the best combination of economics, issuers’ ability to profitably aggregate and securitize the loans, and terms and conditions and servicing quality. Many borrowers have investor demand for resultant CMBS bonds. long standing servicing relationships with their lenders and the mortgage bankers who provide servicing on the lenders’ behalf. The servicer for a typical fixed rate CMBS transaction is determined through a process in which the issuer sells the primary and master In most CMBS transactions, the primary and master servicing is servicing rights to the highest bidder. This process by which the servicer sold to the highest bidder. When a CMBS conduit loan is made, the is selected and CMBS servicing rights are sold has contributed borrower may not know who their servicer will be. If the borrower to the servicing quality concerns. However, there is an alternative has credit issues or requires approvals and consents, an unknown that would improve servicing quality and benefit borrowers, loan special servicer is part of the approval process. This structure creates originators and investors. The industry would greatly benefit from concerns for CMBS borrowers. Portfolio lenders are generally a change from the current purchased servicing construct to a thought to provide a higher level of borrower customer service, fee-for-services business model for new issue CMBS. either directly or through their mortgage banking correspondents, than CMBS servicers. In the early development of the CMBS industry, issuers awarded the servicing on new transactions to the master servicers on a The quality of servicing has also been an issue identified by investors fee-for-services basis. The winning bidder was selected based in legacy CMBS transactions. These investors have complained on a combination of both the economics of the servicing fee bid about the availability and quality of the information produced by and qualitative measures. As the economics of the business of servicers. The Commercial Real Estate Finance Council has made aggregating and securitizing commercial mortgages became more significant efforts to enhance and improve the quality and availability competitive and issuer profit margins compressed, the issuers of information for CMBS investors, and servicers have contributed began selling the servicing rights to the highest bidder. As the greatly to these ongoing efforts. CMBS market has developed, the sale of servicing rights came to represent a large proportion of the issuers’ profits. The selection The residential mortgage servicing business has received considerable of the primary and master servicer became purely an economic attention from regulators to “fix” structural issues, and improve decision. Servicing quality was no longer a consideration beyond servicing quality and responsiveness to borrowers. Fortunately, meeting the minimum rating agency servicer rating qualifications. CMBS servicing is not similarly broken. The highest rated servicers have no competitive advantage over those with minimally acceptable ratings. Servicers had no incentive Can servicing be improved to attract these borrowers and investors to provide higher quality borrower customer service or improve back to CMBS? investor reporting. The mortgage bankers who originated CMBS conduit loans were disintermediated through the sale of the primary Servicing is a particularly important issue as the commercial servicing rights. Mortgage bankers were unable to retain the primary mortgage-backed security market slowly recovers from its nadir in servicing as issuers were able to extract more value through their sale 2008. Market participants continue to search for ways to improve to the master servicers. As a result, the borrowers were unable to the product and increase issuance to encompass a meaningful maintain their relationships with their local mortgage bankers. CRE Finance World Autumn 2012 10


CRE Finance World, Autumn 2012
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