Sometimes when I tell a “civilian” that my career is servicing commercial mortgage loans (“CMLs”) the initial response is, “Is that like collections?” I usually gently respond that I hope not. When I discuss the same with someone in the real estate finance industry the response is often, “So you guys collect payments?” That is closer to the mark but my answer is usually followed by “Yes…and…” Today I want to give you food for thought regarding what servicers do with commercial mortgage loans, how they interact with investors and borrowers and why having a full servicing platform at your disposal might be good for you.
So, here goes…CML servicing is broken up into four basic categories of responsibilities: Cashiering, Loan Administration, Collateral Surveillance and Asset Management. While there are tasks that fall into more than one category from time to time and there are certain functions that occur only at the beginning and end of the servicing process (e.g. new loans setup, payoff processing) these four categories cover most of what we do day-to-day.
Cashiering includes billing, collecting and posting payments to the servicing system and remitting and reporting cash to investors. Key controls and a robust servicing system assist in eliminating errors. Servicing systems calculate payments due, P & I splits and additional amounts due, generate bills and maintain detailed loan histories. The underlying data is generated based on accurate loan setup at origination, and when principal curtailments, earnouts and construction draw disbursements occur. Servicing systems generate remittance reports based on an investor’s needs. Generating remittance data from the servicing system assures accurate accounting between the servicer and the investor. Cash movement is handled electronically among all parties including the servicer, investors and (as often as possible) the borrowers. The bank accounts of each party are subject to controls administered by each parties’ banks. Despite automation, the need for highly trained personnel with backgrounds often in accounting and finance is required.
Loan Administration includes administering lender and borrower requirements related to property taxes, insurance, UCCs, IRS reporting and other less analytical activities. Often, individual servicing personnel will be required to be adept at many, if not all, of these areas. The servicing system assists personnel in tracking key dates, lender requirements, escrow funds and often generates escrow analyses and standard IRS forms. The increasing challenge for people handling these responsibilities is related to insurance. Due to variations in investor insurance requirements, increasingly specialized coverages and complex policies personnel often must have specialized insurance training and are often supported by insurance consultants.
Collateral Surveillance refers to risk mitigation related to the real estate securing the loan. Key activities include operating statement and rent roll analysis and property inspections. Data related to operations is captured electronically, analyzed and reported to investors. This data allows the investor to value the loan, perform portfolio-level analysis and monitor its ongoing risk accordingly. Property inspection reports provide insight into the collateral’s physical condition. Property inspection reports also provide insights into tenancy, accessibility, the surrounding neighborhood and comparable assets. Deferred maintenance is noted in the report which prompts the servicer to take appropriate action on the investor’s behalf. Collateral surveillance duties may be handled by servicing personnel, the investor, third-party service providers or any combination thereof depending on the investor’s risk management requirements. Regardless of the mix, personnel working in this area often have specialized training in real estate, construction management and financial analysis.
Asset Management requires the highest level of expertise and is driven by the structure of the loan, the level of leverage and the complexity of the collateral. A low leverage loan with little structure collateralized by a fully mature property requires the least amount of expertise. A loan with higher leverage, multiple fundings, loan covenants related to collateral performance, cash management via lockbox, pre-designated collateral release provisions, and/or post-closing obligations and collateralized by properties being constructed, repositioned or subject to specialized action plans (e.g. PIPs, environmental remediation) requires the greatest level of expertise. Similar to collateral surveillance activities, the investor determines the risk management plan and executes that plan through the servicer, their own personnel, specialized third-party service providers or any combination of the three. Competency related to commercial real estate, financial analysis, valuations, finance and property type-specific expertise is required.
Essex Financial Services provides all of these services to 50 life companies, mortgage banking firms and direct lenders for lending programs including core, bridge, construction and other high yield loan structures. Our assets under management is collateralized by all types of commercial real estate with locations throughout the US. For real estate debt fund managers, we complement your existing servicing strengths, allow your deal-makers to keep making deals and reduce your servicing overhead. For mortgage brokers with no servicing platform placing deals “servicing released” we can assist you in obtaining servicing assignments, consistently staying in front of your valued borrower relationships, meet the ongoing servicing needs of your capital sources and return a healthy portion of servicing revenue to your bottom line for the life of the loan. Give me a call.