CMBS Servicers: Get Primed For 2008

According to a recent report and analysis from Fitch Ratings, the capabilities of commercial mortgage-backed securities (CMBS) servicers are going to be tested in 2008. While this assertion might not seem notable at first glance, Fitch points out an interesting fact: This year will mark the first time that CMBS servicers have truly been tested in the history of the CMBS market.

At play, the rating agency says, are very legitimate stresses driven by fractures in the capital markets, where limited liquidity will likely affect all commercial servicing sectors – primary, master and special.

Deal issuance tailed off substantially at the end of 2007, and commercial real estate collateralized debt obligation issuance ‘virtually stopped,’ Fitch remarks. These factors, among others, caused investors to dig deeply into their bond portfolios.

In turn, servicers' efforts this year will turn from managing the flow transactions to a new set of challenges and risks, which Fitch characterizes as the following:

  • Servicers will likely have to manage a steady stream of investors coming out of the woodwork with portfolio-related inquiries;

  • Fewer securitizations will result in increased bidding competition; and

  • Servicers might have to assess staffing levels, given shifting areas of focus and priority.

‘On the flip side, because of the credit crunch, fewer loans are defeasing or pre-paying,’ Fitch says. ‘Therefore, master servicing portfolios have remained relatively constant as loan inflows and outflows decreased.’

{OPENADS=zone=17}Master servicers, however, are not the only players that must meet new challenges. For years, CMBS special servicers have enjoyed the benefits associated with a strong real estate capital market. Volumes of specially serviced assets were stable or decreased. And even if assets found their way into special servicing departments, abundant capital enabled servicers to quickly dispose of assets.

But in the current environment of tight capital and lower real estate investment activity, special servicers will likely need to hang onto collateral for extended periods. In the short term, special servicing will be time- and cost-intensive. In the long term, loan defaults at maturity might increase.

‘Some servicers have already noted a delay in borrower refinance timing,’ Fitch says. ‘An increase in loan transfers may tax the resources of special servicers. Therefore, the surveillance function of the special servicer is more important than ever. Special servicers who closely monitor watch lists with the named master servicers regarding the potential pipeline of specially serviced assets should be better prepared to handle the increased workload.’

Fitch notes that CMBS delinquencies are currently low – at 31 basis points. But the rating agency expects delinquency activity to double in the next year.

‘With the current situation in the real estate structured finance market, it appears that the challenges faced by servicers will continue to increase,’ the company says.

For its part, Fitch notes that it will ‘enhance its scrutiny of servicer performance, through scheduled, frequent interaction with its rated servicers, including quarterly calls with active master and special servicers to discuss market trends, operational challenges and other servicer issues.’


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