Commercial Lenders Worried by Shortage Of Bids on CMBS Deals

A concern that the servicing industry might be developing into an 'oligopoly' (with only a few major

players) surfaced, at a panel session during the Commercial Mortgage Securities Association's annual convention.

Stacey Berger, executive vice president, Midland Loan Services said that the industry has "consolidated down so much" that on some deals there are only one or two bids.

"Only banks can manage the capital intensive aspect," he noted, adding, "don't make us invest, pay us a fee.

If we're not doing a good job, fire us."

The commercial mortgage-backed securities industry "is focused solely on economics, not on quality," according to him. This results in the sale of CMBS rights to the highest bidder, while the servicers who invest a lot get a fixed fee.

He noted, "Servicing advances are the facilitator for taking mortgages and creating liquidity. Servicers are asked to do things that put them in a situation where the ability to provide advances is in question."

And investors on the other hand want more and better information, he added.

While servicers are paid a fee, interest earned adds about 50% of a servicer's normal return and there is a need to hedge this, Mr. Berger said, which makes the business speculative to some extent.

"Servicers have to understand the economics of the business to survive. It is a complicated business," he observed.

Christopher Hoeffel, senior managing director, Bear Stearns & Co., said, "You need a lot of people competing. If not, there will be a negative impact."

Russell Goldenberg, group senior vice president, ABN/Amro LaSalle Bank, said that considering that billions of dollars are moved industrywide every month, the issues are at the margin of the industry and "we're not talking about a complete meltdown."

Eric Hillenbrand, senior vice president/ managing director, Banc One Capital Corp., noted there should be the "capacity to communicate" between a master servicer and special servicer.

When moderator Richard D. Jones, a partner with Dechert, posed a question about fiduciary responsibility, Mr. Goldenberg said that they owned a fiduciary responsibility to the industry.

Mr. Berger sees his firm as a fiduciary to the trust and investors.

He considers Midland's customers to be CMBS issuers with "derivative customers" being their customers, the borrowers.

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