CMBS Servicing: The Basics
Unlike traditional bank loans, CMBS loans are not serviced by the lenders that issue them. Instead, after conduit loans are securitized and sold as commercial mortgage backed securities, they are serviced by third-party companies. In general, borrowers do not have any say in the companies that service their loans; this is decided by the lender.
In most cases, multiple loan servicing companies will be assigned to a CMBS loan. Day-to-day servicing is typically taken care of by a master servicer. However, if a borrower defaults on their loan, servicing will be shifted to special servicer, who will either attempt to help the borrower become current, or, alternately, will decide to foreclose on the property.
CMBS Pooling and Servicing Agreements (PSAs)
Potential CMBS borrowers should understand that conduit loans are governed by lengthy and complex contracts, known as Pooling and Servicing Agreements, or PSAs. A PSA will lay out the various rights and responsibilities of a master servicer, a special servicer, the investors, and any other relevant parties. On average, PSAs are often 400- 500+ pages long and sometimes contain hundreds of definitions. This can make them difficult to understand, especially as their definitions and rules can sometimes differ from the definitions in the actual loan agreement. However, it is still important for borrowers to read (or have an attorney or advisor read) through their loan’s Pooling and Servicing Agreement, in order to understand exactly what will be expected from them.
The Role of the Master Servicer
Master servicers are generally responsible for handling everyday issues, such as collecting and receiving collecting monthly mortgage payments and required escrows, paying insurance premiums and real estate taxes, maintaining books and records related a borrower’s loan, and keeping tabs on a borrower to prevent issues that could lead to a loan default. While master servicers can usually handle small borrower requests, such as lease approvals and minor credit issues, for larger issues, such as loan assumptions, they will often need approval of the special servicer, as well as the investors. In some scenarios, a master servicer may actually assign a secondary servicer, known as a primary servicer, to execute many of the everyday functions that they are responsible for.
The Role of the Special Servicer
If a conduit loan goes into default, a special servicer will take over the servicing of the loan. In most cases, this is a separate firm, but some situations, one servicer will carry out the functions of both a master servicer and a special servicer. In an ideal situation, the special servicer will do everything they can to help the borrower get current on their loan, avoiding a foreclosure. However, the special servicer’s responsibility is to the investors, not to the borrower. In fact, in most CMBS deals, the b-piece buyers (the bondholders with the riskiest class of CMBS) actually get to choose the special servicer. Since they are the last group of bondholders to get paid if the borrower defaults on their loan, b-piece investors often want to be able to choose a special servicer they believe will work diligently in their best interests.
Unfortunately, some special servicers have a reputation for putting their own needs before that of both investors and borrowers. Due to the fact that special servicers often have the right to acquire a foreclosed property at a discount, some firms will intentionally foreclose on a property simply in order to purchase it. However, it should be noted that b-piece investors can replace a special servicer at any time if they believe the firm is not acting in their best interests.
It’s important to keep in mind that borrowers generally do not have any control over which servicing companies work on their loans; however, they may be able to find out which ones are assigned before signing a loan agreement. If a deal has a special servicer with a particularly bad reputation, a borrower may want to think twice before signing on the dotted line.
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