Keeping Current With Midland Loan Services’ Tim Steward
MBA NewsLink interviewed Timothy E. Steward, Senior Vice President and co-head of Midland Loan Services, a PNC Real Estate business. Steward leads a team of more than 500 professionals responsible for delivering loan servicing, asset management and technology services to the commercial real estate finance industry.
MBA NEWSLINK: You manage one of the largest third-party loan servicers in the country. From your vantage point how is COVID-19 impacting loan servicing operations? Is it limited to special servicing or is it also affecting other areas?
TIMOTHY STEWARD: In this environment, one would expect an increase in defaults and more loans moving into special servicing. While these are tangible aspects of COVID-19, they are by no means the only impact to a servicing organization.
There are several other areas of our platform where we are seeing a sharp rise in activity, including:
- Borrower Relief Requests: We have received thousands of requests for relief from borrowers that have been hit hard by business closures and stay-at-home orders. Each of those need to be analyzed and processed by an asset manager.
- Special Servicing Transfers: As a master servicer we also have responsibility for tracking and determining special servicing transfer events, so our team that handles that process is extremely busy right now.
- Investor Reporting: With more forbearance agreements and loan modifications coming through there is additional work required on reporting changes and validation. We’re also spending more time on servicer advance tracking and reporting.
- Loan Covenant Tracking: Many of the loans we service have loan covenants such as a minimum debt coverage requirement, which needs to be regularly monitored and tested. We are seeing a lot more of those covenants “trigger,” which requires additional action.
The last thing I’ll mention is that the lenders and investors we service for are obviously concerned about the performance and credit quality of their loan portfolios. As such, we are receiving a significant number of requests for more detailed information, special reports and frequent updates. We certainly understand their need for information and do everything we can to accommodate them, but it creates a great deal of additional work.
These are just a few examples, but I would be hard pressed to think of an area of our business that isn’t feeling an impact.
NEWSLINK: When a borrower fails to make their monthly debt service payment the Master Servicer advances the scheduled principal and interest to the CMBS bondholders. In this environment, where payment delinquencies are rising rapidly, how are Master Servicers handling this obligation?
STEWARD: There are three Master Servicers that dominate the CMBS servicing market and all of them are banks. At Midland we are hyper-focused on servicing advances and I suspect the others are too. Master Servicers play an important role by providing liquidity, so that CMBS bondholders do not experience shortfalls as a result of borrower delinquencies. They also make certain property protection advances in order to preserve the value of the loan and collateral.
We spend a considerable amount of time analyzing and internally reporting on servicer advances. Over the last 90 days advances have increased significantly and we think that will continue so we have made longer term projections for P&I and property protections advances.
Master Servicers are only obligated to advance to the extent it’s deemed recoverable, and as we move deeper into this downturn and loan level advances mount, it will place greater emphasis on the Master Servicer’s non-recoverable determinations and those calculations are highly dependent on collateral valuations and transparent dialogue with special servicers.
NEWSLINK: You mentioned earlier that COVID-19 is having a significant impact on your business and servicing activity is spiking in multiple areas. What options does a servicer have to manage increasing workloads?
STEWARD: As a commercial loan servicer, this is what we do. It’s the nature of our business and we have many senior leaders that have been through real estate cycles before. So, we have some experience with how to ramp up and manage resources in order to meet our contractual obligations and serve our customers. Long before COVID-19 ended the record-long economic expansion, we were planning and preparing for an eventual CRE market downturn. However, this cycle is very different from the financial crisis 12 years ago or the S&L crisis in the 1980’s due to its velocity and pervasive impact.
Part of the solution to increasing workloads is to add staff. For example, we’ve experienced a big increase in loans transferred to special servicing and we project that will continue for some time. So, we recently hired several loan workout asset managers to help mitigate the workload and address our current needs. In this work-from-home environment onboarding new hires can be a challenge so we had to quickly figure out how to do it successfully on a virtual basis.
However, there are several other options a servicer has to increase capacity and marshal the resources needed to keep up with spiking activity. For instance, when the virus hit, we immediately identified teammates in areas that were expected to experience a slowdown and we redeployed them to hot spots in our business. Like many servicers Midland has historically used vendors to perform certain servicing functions. So we turned to a couple of our trusted partners and leveraged their capacity in order to manage higher volumes. Additionally, technology plays a big part in our efficiency and we’re fortunate to have the Enterprise! loan servicing system, which is very scalable.
Lastly, it really comes down to hard work. Many of my teammates are putting in a lot of overtime and going the extra mile. I have been so impressed with how the team has risen to the challenge and is doing everything possible to keep things going during these difficult times.
NEWSLINK: Commercial/multifamily borrowers are experiencing severe financial stress due to state and local business restrictions and “stay-at-home” orders. A large number of borrowers are turning to their loan servicers for guidance and assistance. Can you talk about what servicers are doing to manage record high customer call volume?
STEWARD: We always strive to deliver exceptional service but it’s especially challenging right now given the urgency and sheer volume of calls. CRE owners and operators have really been hit hard by this pandemic and they need help. Our customer facing teams are dealing with borrowers that are understandably stressed and frustrated so these aren’t easy conversations. We’re doing everything we can to be responsive, compassionate and supportive. We have formed a taskforce, streamlined our information gathering process and provided extra training for our teammates that are on the front lines, dealing with the calls and inquires.
We assess each situation as fast as we can, but there is not a one-size-fits-all solution. Relief options depend on who we’re servicing for – Agency, bank, life companies or CMBS (and even that will vary by directing certificate holder).
NEWSLINK: There are quite a few programs, legislative stimulus efforts, government directives and industry standards that directly impact how servicers do their job. How can servicers keep up with the rapidly changing landscape and manage their operational risk?
STEWARD: Things are very fluid right now and how we deliver our services is evolving in response to COVID-19 induced changes. New requirements are coming at us from all angles and it’s very challenging to stay ahead of the curve.
Some of the changes are relatively straightforward such as those associated with the updated CREFC IRP (8.1). Freddie Mac and Fannie Mae have proscriptive forbearance programs that servicers need to understand and follow. Other measures create more serious issues for servicers such as state orders and legislation which can potentially restrict lender/servicer actions and remedy options.
I’d recommend that servicers work closely with their legal partners. At Midland, we work with our in-house legal team on a daily basis, as they continually monitor the current legal/regulatory landscape. We also regularly engage outside counsel to advise us on any local law matters. These close partnerships enable our servicing and asset management teams to be prepared and avoid surprises. Another way to stay current and well informed is to participate in industry working groups and engage with trade associations such as the MBA. Timely, accurate and transparent communication is critical due to the pace of information and decisions needing to be made.
Servicers must remain vigilant about tracking the unprecedented level of change that’s occurring right now. It will have a direct impact on how they conduct their business. If they don’t pay attention they might not only fail to meet customer expectations, but they might also expose their company to legal, financial and reputational risk.
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