New regulations have, and are expected to continue to impact the commercial real estate mortgage servicing industry, while process redesign and technology implementations are helping organizations improve efficiency, expand offerings and in many cases, retain staff, according to the results of a live survey conducted at the recent Mortgage Bankers Association CRE Servicing and Technology conference in Dallas.
To close out the conference, the audience of approximately 100 participants were given remote controls and asked a series of questions. After each question, the results were displayed and a panel of industry participants gave their perspectives. While hardly a scientific process, the survey provided unique insight into the thinking of conference attendees.
Nearly half of respondents, 44%, said new requirements under the Securities and Exchange Commission’s Regulation AB, the Dodd-Frank Act and next generation mortgage-backed securities deals dubbed CMBS 2.0 and 3.0 have affected their businesses “a lot,” while 38% said it was too early to tell or to be determined how the regulatory changes would impact them.
“With Dodd-Frank, we’re still trying to figure it all out and how it’s really going to affect us and how we’re going to educate everyone in our shop so that we’re compliant,” said panelist Laura Brooks, the loan servicing manager of Pacific Southwest Realty Services.
The registration, disclosure and reporting requirements for asset-backed securities in Reg AB impacted 32% of respondents the most, followed by the Volcker Rule (26%), Dodd-Frank (20%) CMBS 2.0/3.0 (14%) and the Federal Housing Authority’s regulations for insuring nursing home and other senior assisted living facilities (9%).
The regulatory changes come at the same time that servicers are dealing with declining portfolio sizes, performance, profitability and fewer originations to make up for the loss. The majority of audience respondents, 56%, said they’ve relied on process redesign to handle the changes, while 24% reported investing in new technology. Only 7% said they’ve reduced staff and 13% said they’ve turned to domestic or offshore outsourcing.
“We’re observing that servicers are doing all of these things with various degrees of success,” said Tim Steward, director of the servicer evaluations group at Standard & Poor’s. “Some servicers are expanding their service offering and go after business they historically haven’t been interested in.”
Many CMBS servicing specialists are now expanding their offerings to make up for the decline in business. “Servicers are taking a look at what their core competencies are and trying to apply that in other uses,” Steward said.
“We’ve found that by investing in new technology we can maintain the same core group of people but do more and handle more loans,” said another panelist, Lee Van Asselt, asset manager at Grandbridge Real Estate Capital.
But expanding service offerings can also create potential conflicts of interest. Respondents were nearly split—54% reporting yes and 46% reporting no—when asked if avoiding conflicts of interest is a topic being addressed or discussed at their firms.
“In the special servicing world, a special servicer can also be a broker, property manager, leasing agent, among others when trying to work out the loan with the borrower,” said John Church, the CEO of Waterstone Asset Management and moderator of the panel. “Different institutions are trying to add different verticals, some with success; others have had to shut them down.”
Steward said the problem is largely a legacy issue, as enhanced controls of CMBS 2.0/3.0 deals address these sorts of concerns. “We don’t feel like it’s our place to tell servicers what’s an appropriate cost for a fee or if they should be involved in multiple verticals, but we want to make sure they have good controls and governance in place,” he said.
The majority of survey respondents, 56%, said their companies’ training and education programs are effective, while 29% said they were “very effective,” and 16% said they were “not effective.”
Steward said that S&P looks for 25 hours of training per employee, per year, when conducting its ratings of organizations, as well as a mentoring component and succession planning to prepare the next generation of servicing executives.
Most of the audience, 54%, said they have personally mentored individuals and the panelists said employees have to be committed to corporate-mandated programs.
When the audience was asked about their feelings on the future of the CRE servicing industry, 72% said conditions are improving, while 20% said they were staying the same and 9% felt the industry was getting worse.
“I think things are improving. There are some demons out there, Europe in particular, and how Germany is going to get everybody together and march forward,” said another panelist, David Dufresne, vice president of Q10 Capital. “But as far as in the U.S., I think we’ve hit bottom. Rates remain relatively low and I think the future is brighter. Having said that, the employment numbers are getting stronger, but they’re not there yet.”
But the audience also felt that improving conditions would benefit larger servicers more than smaller. Given the regulatory and competitive landscape, 68% of the audience said large servicers will grow market share, while 38% believe that small servicers would grow.
“I think large servicers will continue because they have scale and capital to invest in technology,” Steward said. “They will grow market share but they have to be aggressive and learn how to do more with less.”
But there’s still room for smaller servicers that provide a higher level of customer service and specialize in certain geographic areas.
“The smaller servicer can’t provide everything that a large servicer can, but often they’re focused on their lending territory and they are the eyes and ears of what’s going in and what’s going out, so they provide perspective that a larger servicer can’t,” Dufresne said.
