Servicers Stretched as Workload Grows
As the commercial mortgage market has matured in the last 10 years, the role of commercial servicer has become increasingly complex. It's not just about making timely principal and interest payments and managing the occasional delinquency and default anymore. There is much more to do, causing some servicers to complain that their compensation does not reflect this increased workload.
At least on the delinquency and default front, servicers have cause for cheer, with Fitch Ratings reporting that defaults on Fitch-rated commercial mortgage-backed securities fell to 0.40% in 2005, after lingering between 0.80% and 0.85% during the period 2002-2004. The credit rating agency expects the CMBS default rate to decline even further in 2007, even as more exotic property types have found their way into these deals. Fitch's prediction comes with the caveat that "CMBS default rates will be more sensitive to future economic downturns given the higher concentration of more volatile property types and assets securitized in recent CMBS vintages."
On the topic of servicing complexity, Fitch has come out with a report saying that the CMBS servicing environment is "anything but standard." Richard Carlson, Fitch senior director, reports that as loan and deal structures and the regulatory environment have become more complex, and with the development of avenues such as the commercial real estate loan collateralized debt obligation (CREL CDO), the servicing environment has changed a lot.
"Nonstandard servicing opportunities for CMBS servicers are becoming more prevalent, and come with additional covenants, trigger events and reporting requirements," Mr. Carlson notes.
"Servicers increasingly deal with third-party investors who have a say in the servicing of the loan, which makes it all the more important that the CMBS servicer is able to service the loan in a way that fulfills its duties under the servicing standard while satisfying third party investors."
On the regulatory front, the Sarbanes-Oxley Act of 2002 led to heightened scrutiny of servicers and their reporting. And the Securities and Exchange Commission came out with Regulation AB, which took effect in 2006 and regulated investor disclosures on asset-backed securities. Previous to that, SEC disclosures were geared to corporates and their securities and the growth of the ABS financing avenue prompted the SEC to come up with specific regulations for ABS disclosures.
CMBS deals now have evolved to include "nonstandard" opportunities such as servicing multiple positions in the debt structure, "esoteric" asset servicing and CREL CDO servicing. The servicing of multiple positions on a loan means keeping track of all the loan requirements and parties to the financing.
Of late, mortgages on assets other than the primary commercial property types have also been securitized. These "nontraditional" assets include condominium conversion loans, cellular towers, parking garages and timberland. The viability of securitizing casino deals is also being debated.
Another servicing opportunity has emerged as the servicing on assets in CDO deals has been farmed out to outside servicers as CDO asset managers do not have the servicing competencies.
While some of the aspects of CDO servicing, including asset-level and pool-level reporting are different from the CMBS reporting requirements, Fitch finds the servicing of CDOs to be "very similar" to CMBS servicing.
Even then, the CDO servicing is more challenging considering that CDOs are usually revolving pools, rather than the static CMBS pools servicers are familiar with. Also, there is no standard reporting package for CDOs, which means the reporting is more manual. Therefore, Fitch advises that "CMBS servicers should be certain of the particular servicing and reporting requirements associated with a transaction before they accept the servicing assignment."
Another challenge for servicers Fitch sees is in obtaining loan-level underwriting data for newly closed CMBS transactions. This means that the servicer cannot look into property operating variances. Yet another twist is that many recent deals have used two or more master servicers.
And if all these complexities introduced by the human element are not enough, servicers now have to contend with nature-introduced issues in the form of windstorm insurance. In the last year, in the wake of the active 2005 hurricane season in the U.S., windstorm insurance premiums have gone up as much as 400%, Fitch reports. As various carriers reduced their exposures to hurricane-impacted markets in Florida and the Gulf Coast, servicers have had to come up with "creative measures" to ensure that properties in their servicing portfolios are sufficiently insured. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com