Morningstar Offers Servicing Risk Assessment Method

Shortcomings in the foreclosure processing practices that brought mortgage servicers’ business activity under the microscope are also bringing about new servicing performance assessment tools that are available for market testing.

Morningstar Credit Ratings LLC, a nationally recognized statistical rating organization, has published a methodology document that outlines the process it will apply to evaluate “the operational capabilities and performance of commercial mortgage master, primary and special servicers.”

The new methodology analyzes a wider array of features.

According to Morningstar’s operational risk assessment practice managing director, Michael Gutierrez, the assessments and rankings offer investors “a clear and independent opinion of a servicer’s ability to manage non-credit-related risks and requirements within different types of servicing assignments.”

The operational risk assessment practice—which is part of is the structured credit research and ratings subsidiary of Chicago-based Morningstar Inc.—has created methodologies that enable users to rank commercial and residential mortgage servicing providers.

Morningstar reviews “a number of quantitative and qualitative measures across the organization” focusing on servicers’ practices, performance results and operational characteristics.

These assessments tools are in demand in times when investors are overly cautious in their mortgage market activity and expect high efficiency in the servicing of securitized mortgage loans.

Morningstar said the methodology enables investors to evaluate “how effectively special servicers manage any inherent conflicts of interest” in a given transaction between their assigned roles in commercial mortgage-backed securities transactions and the investment positions of their affiliates or parent companies in the bonds of the transactions for which they provide servicing.

Morningstar uses a four-tiered scale.

The operational risk assessment assigns commercial servicer rankings ranging from “MOR CS1” (highest) to “MOR CS4” (lowest).

The methodology also provides “distinct rankings.” It uses “MOR SBC” for small-balance commercial mortgage servicing, “MOR BBC” for business-based loan servicing and “MOR CC” for construction loan servicing.

Morningstar’s online and print independent investment research data is based on approximately 390,000 investment offerings. Current operational risk assessments of commercial servicers along with information about the methodology are available on the Morningstar website.