Most Servicers Fail To Meet Rating Criteria

More servicers are getting upgraded, or so it seems, because the story behind the scenes indicates the majority of preliminary servicer operation ratings gravitate towards the opposite direction.

Fitch executives told this publication that there is increased interest from servicers and special servicers of various types of assets to get an operational grade by the agency. However, most on both the commercial and the residential side of the market fail to qualify.

According to Fitch's commercial mortgage structured finance senior director, Richard Carlson, more CMBS servicers are showing interest in getting rated, "because they see value" in getting a good grade, but about 75% of those who request it do not qualify. As to servicers who do not meet Fitch's criteria in the residential side of the business, "they are in the hundreds" compared to probably another 30 servicers that would qualify, says Fitch analyst Diane Pendley. And if some sources measure the market at well over one thousand, she says the servicing environment has changed so drastically because of the crisis that it would be pure speculation to quantify how many servicer shops are out there.

Criteria in both the residential and commercial market focus on three main areas of operation: financial condition and level of capitalization, the firm's experience in servicing loans, and staff expertise and qualifications. It has been developed to make sure servicers are properly evaluated before they enter the marketplace, she adds.

Speakers at the MBA Commercial/Multifamily Servicing and Technology Conference in New York also noted that more servicers are seeing value in getting rated by agencies while investors are watching.

One way the crisis has affected investor behavior is that now at least CMBS investors are doing more in-house due diligence and looking less at agency ratings, said Moody's senior vice president, Michael Gerdes, "which is a good thing."

For example, CMBS servicers are required to provide an executive summary, company financial statements, a description of deals they have done in the past and whether they are active at present. Of those "who make the cut," Carlson says, the majority are special servicers.

Apparently rating agencies are both scrutinized and in demand. And that is especially true for specialty servicers who need to use agency ratings as a good-faith business card.

For RMBS servicers the biggest impediment in qualifying is that once the property is taken under foreclosure it goes into the REO stock which still is relatively new for many servicer shops which do not have the required expertise, Pendley says.

It is also where special servicing assistance comes into play. Fitch has seen an equally high interest in getting operational review ratings from the residential mortgage special servicing side mostly due to amplified demand for default loan servicing from both private and GSE servicers.

The crisis has created a new dynamic between rating agencies like Fitch and market demand for more diligent valuations. Market changes coupled with operational review demand is compelling Fitch to review what it looks into in loss mitigation practices.

At least once a year Fitch analysts get together to talk about market trends, new tools and best practices that may affect criteria changes. Technology affects the loan "even in a benign real estate market" and then there are a myriad of regulatory changes, all of which would require criteria updates. In the default area basic criteria has not changed, she said, but it has to adapt to the market.

"Criteria have to be a living thing."