Fitch Praises REIT Servicers

While mortgage REITs face several obstacles to obtaining high marks from rating agencies, having a capable loan servicing unit can help ease the concerns of a rating agency, according to a recent report from Fitch Ratings.

While saying there is no "cap or floor" on the ratings a mortgage REIT can obtain, Fitch Ratings says that capital retention and shareholder return factors will likely limit the rating upside to the 'A' range from an economic standpoint.

Funding diversity, liquidity and unencumbered assets also tend to be obstacles that REITs face in trying to achieve high ratings. Higher ratings are desirable because they generally reduce a company's cost of debt.

Fitch also praises mortgage issuers that have a loan servicing capability, calling servicers and special servicers "the backbone of the mortgage REIT industry.

"Fitch believes that issuers with a servicing capability may have a marginally to significantly more defensible business model because of the high barriers to entry required to build a competent servicing platform," the report said. "These companies also benefit from the market intelligence gained from having a hands-on approach to managing assets. These advantages may not become evident until a truly weak part of the real estate cycle emerges."

Servicing capacity is also a benefit to REITs focused on commercial mortgage lending, Fitch said. An increasingly common feature of commercial mortgage REITs is a real estate servicing platform to balance out the company's investing strategy.

The balance comes into play because the servicing platform generates fee income from commercial mortgages, augmenting the financial income that comes from interest rate spreads.

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