Does anyone (other than the borrowers) care about servicing quality?
Commercial mortgages have become more complex and highly structured. A high proportion of fixed-rate loans are now securitized. These loans are sourced by mortgage bankers or originated directly by a commercial bank or investment bank. The loans are then transferred to a trust, which is funded by commercial mortgage-backed security (CMBS) bonds rated from AAA through unrated, and sold to a variety of institutional investors and specialty finance companies.
Another significant change has occurred at the borrower level. Many large, entrepreneurial borrowers have become publicly traded companies. Their level of capitalization and financial sophistication has increased. Historically, institutional lenders required the borrower to provide a personal financial guarantee as credit support for the loan in addition to a security interest in the collateral property. In the current environment, most term loans are nonrecourse to the borrower except for environmental and fraud carve-outs.
Loan servicing has changed in response to the changes in the real estate finance industry. Where once a lender or its representative mortgage banker maintained a borrower relationship for the life of the loan, now many borrowers close CMBS loans without knowing who their servicer will be until a "hello" letter arrives. The borrower has no one with a stake in his or her relationship to rely on.
Providing high-quality service seems like a Sysyphean task for commercial loan servicers: The harder you try, the steeper the slope--with the continual threat of being rolled over by a very big rock.
Economics are a big factor in the dynamic relationship between servicers and borrowers. Servicing fees have been dramatically reduced over the last decade. This is a result of the capital markets fostering intense competition, which has reduced loan spreads to borrowers and, ultimately, the amount available for servicing fees. More and more commercial loan products are commodities. Today, Fannie Mae Delegated Underwriter and Servicer[TM] (DUS) program lenders compete primarily on fees. Servicers purchase CMBS servicing rights and become the surrogate lender; typically the sale of servicing rights represents about half the net issuance profit in these transactions. The most competitive CMBS servicers have very large portfolios (up to 25,000 loans) to effect economies of scale. Providing high-quality borrower customer service increases the servicing cost per loan and reduces the return on the investment in purchased servicing rights.
One of the challenges in commercial loan servicing is that activities vary from routine to very complex and management-intensive. Billing and payment processing takes place on a monthly basis. Financial statements and rent rolls are collected quarterly. Taxes, insurance and escrows are administered annually or semiannually. Reserve draws, lease approvals and Subordination, Non-Disturbance and Attornment Agreements (SNDAs) occur somewhat less frequently and require more active management. Borrower-initiated requests are unpredictable and typically have credit implications that require analysis or reunder-writing in the case of an assignment, assumption or approval of secondary debt. These asset-management activities require skilled professionals and active interface and communications with the borrowers. Payoffs or defeasance occur only once during the life of a loan.
Servicers have invested significantly in technology to support the routine customer-service functions. Borrower Internet portals provide 24/7 access to information such as the current monthly bill; payment history; tax, insurance and escrow information; and contact information. Some servicers provide customer-service reps with the ability to simultaneously view the same information as the borrower, which facilitates communications. By empowering borrowers with access to information in response to routine inquiries, the customer-service experience is enhanced and the numbers of calls that require personal responses are reduced, thereby decreasing costs. This is a win/win situation for both the servicer and the borrower.
The most significant servicing issues are associated with borrower-initiated requests. These include assignments, assumptions, modifications, release or substitution of collateral, transfer of the borrowing entity, approval of secondary financing, release of a guarantee. The servicer needs substantial information from the borrower to analyze and process these requests. In CMBS transactions, the servicer may require a number of external approvals or consents from parties that the borrower is totally unaware of. These include special servicers, controlling class holder representatives and rating agencies. Some of these items are restricted or prohibited under real estate mortgage investment conduit (REMIC) tax laws, which govern the CMBS structures. In many cases a REMIC tax opinion is required, which is an expense passed through to the borrower.
Time and expense are always considerations in processing borrower-initiated requests. One of the biggest problems is getting all of the necessary information and documentation from the borrower. The servicer can't process the request and get subsequent approvals from other parties without a complete package. Providing the borrower with a comprehensive description of these requirements can mitigate these problems. Good communication is crucial to expedite the process and maintain borrower satisfaction. Some servicers outsource their asset-management activities, which can reduce costs but may cause additional delays and communications issues.
Quality borrower customer service requires responsiveness and attention to detail. Proactive communication is critical to setting borrowers' expectations and managing the process. Prioritization is important to meet tight deadlines and accommodate important borrower relationships or high-profile transactions.
Borrowers deserve knowledgeable and attentive customer service representatives. They should be informed of the approval process and requisite parties, as well as the status of their request. In return, they should be realistic about the time it takes to process a request, and take responsibility for the delays caused by their inability to provide all of the required information and documentation.
Loan originators are becoming more aware of their borrowers' servicing issues. Borrowers are becoming more vocal about the preference and avoidance of certain servicers. Portfolio lenders, as well as Fannie Mae and Freddie Mac lenders that retain their borrower relationships, promote these advantages over CMBS. Some financial institutions with vertically integrated CMBS programs that originate loans and retain the servicing rights are using this as a competitive advantage versus the use of unaffiliated third-party servicers. And some servicers have used their reputation for high-quality customer service to attract business through borrower referrals to their lenders.
Borrower satisfaction is becoming a hot topic in commercial real estate finance. Conference panels and articles on the topic abound. The Mortgage Bankers Association (MBA) and Commercial Mortgage Securities Association (CMSA) recently published The Borrower Guide to CMBS (www.mortgagebankers.org/industry/docs/04/cmbsborrowersbrochurefinal_web.pdf). Awareness should bring improvements as lenders and servicers become more attuned to these issues.
Unfortunately, there are some countervailing trends, which bode ill for improvements in borrower satisfaction. Again, economics are the driving force. Loan structures are getting more complex. CMBS special servicers are requiring that master servicers split asset-management fees. Conduit originators are competing for loans by waiving asset-management fees. And many CMBS issuers continue to sell their servicing rights and borrower relationships to the highest bidder, regardless of quality.
The growth of the commercial real estate finance industry is ultimately dependant on the borrower. Historically low interest rates are currently driving record origination and securitization volumes. However, I believe that ultimately the borrowers will prevail and lenders will be forced to compete on servicing quality and borrower satisfaction as well as proceeds and spread.
Stacey M. Berger is executive vice president of Overland Park, Kansas based Midland Loan Services Inc., a provider of loan servicing and technology solutions to the commercial real estate finance industry. He can be reached at email@example.com.
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|Title Annotation:||COMMERCIAL REAL ESTATE FINANCE industry|
|Author:||Berger, Stacey M.|
|Date:||Jul 1, 2005|
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