PERSON OF THE WEEK: From selecting the proper technology to meeting strict investor reporting requirements to deciding on payment options and more, commercial mortgage servicers face a tough set of challenges – and choices – in this current industry landscape.
But as Sherri Carr, vice president, commercial servicer product development, for FICS, tells MortgageOrb in a recent interview, flexibility is a key consideration when strategizing how to overcome these challenges.
Q: What challenges do commercial servicers face when selecting their servicing software?
Carr: No servicing software application is “one size fits all.” When it comes to selecting servicing software, commercial servicers need to remember that there is no single “cookie cutter” approach available, as servicing needs differ for each loan product.
In the long run, commercial servicers need to find a software solution that is flexible enough to automate a majority of their servicing and reporting requirements, since commercial loans are not held to the same constraints as mortgage loans.
People may think commercial lenders’ portfolios consist solely of commercial or multifamily loans. In reality, the commercial lending arena encompasses a wide assortment of loans, such as small business, municipal airport, agricultural, even taxi medallion loans.
Commercial servicing software must be flexible enough to accommodate the diverse and unique needs of various loan types, as well as basic commercial loans.
Commercial servicing software must also allow room for growth. It needs to fit the current business structure of a company while also providing room for expansion into other types of loans and financing.
Q: What makes investor reporting challenging for commercial servicers?
Carr: Investor reporting of any nature can be challenging. When it comes to commercial loans, investor requirements have grown increasingly more challenging.
On top of agency lending, servicers must also meet the requirements of a vast number of private investors.
Therefore, flexible loan products and robust investor reporting capabilities are essential to meet the demands of commercial investors. Providing accurate and detailed information is necessary to retain amicable investor relations.
Q: What do commercial servicers need to consider regarding payment options and escrow administration?
Carr: Flexibility is also important when dealing with payment options and escrow administration.
With complex financial transactions, loan payments contain more attributes and are larger, and operating income can be subject to seasonal variations. Furthermore, less common payment frequencies such as quarterly or semi-annually tend to be used instead of monthly as is customary with residential mortgages. Therefore, payment options may need to be more flexible.
Some land acquisition, development and construction lenders require borrowers to establish a borrower-funded interest reserve account to ensure payment. These funds are usually withheld from the principal amount disbursed and can be tapped to pay the borrower’s debt service during leaner months of property income.
Interest reserves provide funds to service the debt until the property is developed, and cash flow is generated from the sale or lease of the developed property.
Most importantly, servicers must be able to apply payments and make disbursements to varying escrow buckets, so the buckets need to be customizable on a loan-by-loan basis to ensure this happens with ease.
Q: How do commercial lenders benefit from offering flexible loan products?
Carr: Offering flexible loan products is one key strategy to promote repeat business from commercial borrowers. These borrowers want their lender to care about them and their unique needs. By meeting borrowers’ individual needs, servicers demonstrate their commitment to their borrowers’ satisfaction and business success.
Satisfied borrowers are more likely to bring another loan or refinance an existing loan with the same institution. Utilizing flexible loan products and finding outside investors that will buy these loans allows commercial servicers to bring in additional new business opportunities by accommodating unique lending avenues that other lenders may not be able to reach.
Q: What challenges do asset managers face?
Carr: Asset managers must ensure properties securing their loans are performing at a high enough level to cover the debt service. They are required to collect information to judge the current financial performance of their loans and make informed decisions based on that information.
They also evaluate neighborhood trends to predict future performance. If they find the market in that area is declining, this could be cause for concern.
For example, if a shopping center loses an anchor store, such as Toys R Us, mall traffic and business, in general, tends to decrease. This, in turn, could affect revenue. Asset managers need commercial servicing software that helps them track this crucial information. They also need to be able to generate system reports, as well as custom reports for easy access to information – such as property income and expenses, tenant lists and inspections – to effectively analyze risk.