Stakeholders Ask Servicers for More

MIAMI–Commercial real estate loan servicing has become more challenging as the amount of information sought by various stakeholders has grown “considerably” over the years, analysts say.

“Commercial real estate a good investment,” Morningstar Credit Ratings Senior Vice President of Operational Risk Assessments Michael Merriam said at the Mortgage Bankers Association Commercial/Multifamily Servicing and Technology Conference 2018. “It has performed well and is attractive, but there are a lot of moving pieces, so it needs to be monitored closely. It’s like a jigsaw puzzle; if one or two pieces fall out, it’s not going to hold together anymore. Regardless of which stakeholder you are ultimately reporting to, we as servicers use the same tools to track performance and mitigate risk ahead of time.”

Depending on the situation, commercial real estate stakeholders could include lenders, commercial mortgage-backed securities bondholders, rating agencies and property owners. Even master servicers are a stakeholder for special servicers.

Newmark Realty Capital Senior Portfolio Manager Elizabeth Burnett agreed that CRE servicing often resembles a puzzle–sometimes a three-dimensional puzzle. “You’ve got a collateral and when that asset closes, all the pieces fit together in a way that made the lenders willing to make a loan on that asset,” she said. “As long as the pieces fit together the investment will make a profit.”

Kathleen Olin, Senior Vice President with CWCapital Asset Management, noted each “puzzle piece” provides context about the property’s performance. “If you were to look at financial statements in a vacuum, you might simply ask if the property has a low debt service coverage ratio and are the expenses out of line,” she said. “But you get a much better picture by doing a comparison of the current picture to prior years and to the underwriting.”

Olin said if certain expenses are much larger than anticipated, stakeholders need to know that information. “Don’t just tell me that a number changed; find out why it changed,” she said. “Ask the next question. It’s not enough to just report that the maintenance expense went up 12 percent; that doesn’t help us at all. Take the next step and ask why did that expense go up? Was something misclassified? Is there something inherent to the property that is problematic? Could there be fraud? Maybe there is a line item for snowblowing and the property is in Florida. It’s always the second and third questions that will get you to the reasons why there are variances.”

David Haley, Managing Director with CBRE Loan Services, said loan servicers need to look for significant declines in line items just as much as they search for increases. “Say your borrower’s insurance expense dropped 60 percent. Maybe the insurance deductible was too high, or there was no wind-loss coverage,” he said. “It’s important to focus on all the variations. It may wash out in the end; maybe the debt service coverage ratio is still fine and the net operating income is still fine, but it’s worth looking at.”

Olin said stakeholders look to loan servicers to interpret the numbers. “Anyone can look at numbers and say ‘this is higher or that is lower,’ but we have contact with the borrower so we can get a level of understanding beyond that. Some investors only get to see the debt service coverage ratio, so they won’t be able to recognize potential future problems. They look to us to get the full story and tell the big picture.”