KBRA: Review Those Remittance Reports

Kroll Bond Rating Agency, New York, said higher commercial mortgage-backed securities special servicing volume and modifications increase the risk of operational errors or inconsistencies in servicer and trustee reporting.

“While the bulk of the reporting every month goes smoothly across tens of thousands of loans and hundreds of transactions, we have noted some isolated instances where potential data lags between deals or outright errors have occurred,” KBRA said in a new report, Mind Your Remittance Reports. “As expected, data lags and timing issues can occur with pari passu loans.”

Pari passu arrangements give two or more lenders equal claim to loan collateral in the event of a default.

The report listed the four observations KBRA routinely sees during its monitoring process:

–Inconsistent loan payment status, where a loan is listed current in one transaction and delinquent in another or has different delinquency statuses across deals.

–Lag in reporting updated appraisal values, where such values may be available in one securitization but not appear in another.

–Mismatched servicer or special servicer commentary, where one transaction may report details of a pending modification while another has not changed from the prior month.

–An appraisal reduction is reported in one transaction but not another.

KBRA said it reviews monthly remittances for the presence of interest shortfalls across its rated CMBS universe. “Over the past several months, we have observed noteworthy cases where the causes of such shortfalls were not readily apparent in the remittance or servicer reports, and in some instances, questions posed by KBRA to the transaction parties resulted in restated remittance reports,” the report said.

Servicing challenges are not limited to CRE Loans. In its most recent ACES Mortgage QC Trends Report, ACES Quality Management, Denver, found an overall critical defect rate of 2.34 percent in residential loans, a marked increase from prior quarters and the highest observed since the firm began publishing the report.

“Without a doubt, Q3 2020’s critical defect rate was the highest we’ve seen since ACES began publishing the QC Trends Report in 2016, and while there are multiple factors that attributed to the 25 percent increase in critical defects, the majority of them were COVID-related,” said ACES Executive Vice President Nick Volpe. “Given that many of these factors are still at play, we expect to see continued volatility in defect rates for at least several more quarters.”