Growth in a Borrower-Friendly Age

With the wall of maturities behind us, the loan servicing industry has high expectations for 2018, while it works to improve the borrower experience.

The loan servicing industry is coming off a strong year in 2017, when the number of commercial and multifamily loans being serviced grew by at least $120 billion to reach more than $3.1 trillion, originations were up 15 percent and delinquencies were low.

Expectations for 2018 are also high, with loan servicing executives pointing to areas of growth including increased activity at government-sponsored enterprises Fannie Mae and Freddie Mac, life insurance companies and alternative firms offering specialty and debt funds.

At the same time, they are working to improve the experience for borrowers, viewing this effort as a means to achieve greater market stability—a benefit for both sides of the transaction.

The good news for everyone is that the so-called “wall of maturities” ended with the start of the new year. “(It’s) officially in the rearview mirror,” declared Jamie Woodwell, Mortgage Bankers Association vice president for research and economics.

“It was much more even than what we might have expected,” he observed.

This year, the volume of maturing loans held by non-bank lenders and investors will decrease 42 percent from 2017, Woodwell said, but they will resume their growth and increase starting in 2019.

“If you look at what’s coming due in terms of maturities, it’s $102 billion in 2018 and $131 billion in 2019, primarily due to some two-year loans. Then we see it ramp up to $111 billion by 2020,” he said.

Benefits from housing

Likewise, 2017 originations were at record levels and 2018 should be down slightly but still be “robust,” Woodwell said, attributing last year’s increase to multifamily lending, especially transactions backed by Fannie Mae and Freddie Mac. CMBS and other capital sources also grew.

“(GSE business) is the fastest-growing segment of our organization’s business, and has been over the last year as they have continued to increase their production,” Marty O’Connor, executive vice president, loan servicing & asset management at KeyBank, observed.

About $65 billion of CBRE Loan Services’ U.S. total of approximately $140 billion in servicing went through a GSE channel, according to Chris Shamaly, senior managing director of the Americas.

The firm—a major servicer of Freddie Mac, Fannie Mae and HUD/FHA loans—is also a seller/servicer in Freddie Mac’s new National Single-Family Rental program, servicing its first loan for a portfolio of 110 houses in Florida.

Fannie Mae and Freddie Mac are recent participants in the now three-and-a-half-year-old single-family rental securitization business, according to Stacey Berger, executive vice president of Midland Loan Services, a PNC Real Estate business. “That activity has grown fairly significantly.”

Midland conducts some single-family business, although most of its portfolio consists of approximately 40 percent CMBS, 30 percent life insurance and specialty companies, and 30 percent multifamily GSEs. Midland is also the leading special servicer responsible for default management, workout and resolution of a portfolio of approximately $180 billion in balances, Berger noted.

Midland has continued to expand its relationships with major life insurance companies and is also “seeing fairly significant growth” in the alternative non-lender base with specialty finance companies and debt funds, he observed. “To some degree, those lenders have replaced more transitional loans that went into CMBS in the past.” That includes an increase in bridge loans.

Dean Wheeler, senior vice president & head of investor services operations at Cohen Financial, part of SunTrust, has likewise seen life insurance companies and GSEs more frequently include bridge and mezzanine loans, often as a way to finance upgrades to a property before originating a more traditional agency mortgage.

He also said private equity funds have become more entrepreneurial, giving borrowers more options. “Most of that didn’t exist in the last downturn. It adds stability to the market overall because of their presence today.”

Service with a smile

Increased options aren’t the only improvement for borrowers. In fact, loan servicers have been addressing the borrower experience from a more global perspective, especially in the CMBS servicing area. The CRE Finance Council’s Issuer-Servicer Joint Task Force, for instance, recommended 10 changes to achieve this goal, focusing on standard loan documents, the pooling and servicing agreement, and borrower input to increase clarity, expedite requests and reduce friction.

Common issues still in need of improvement, Berger noted, include length of time to handle routine requests and fees, especially when a special servicer is involved. He observed that the goal is to make the process more efficient and effective by structuring transactions so routine approval is handled by the master servicer. More significant requests, like a change in the borrower entity or property manager or execution of a major lease, would go directly to the special servicer, who could make decisions in consultation with the controlling class holder.

Wells Fargo’s commercial mortgage servicing group has been engaging with its lenders and the task force about loan document simplification, according to Charles Culbreth, executive vice president & head of asset management. “Ambiguous documents are problematic for everybody,” he said.

Wells Fargo routinely tops MBA’s rankings of commercial and multifamily mortgage service providers, and Alan Kronovet, executive vice president & head of its CMS group, said the team services loans totaling some $525 billion to $535 billion.

Kronovet said the group works with its lending partners to review loan documents and provide feedback about provisions and terms that might cause challenges during servicing, including documents required to review, approve and release funds from a reserve or escrow account; the approval process for borrower requests, such as lease approvals; and reducing, capping or eliminating processing fees.

O’Connor said KeyBank also faces fee compression issues, as well as clients seeking quicker turnarounds for all requests. “That challenges resources and staffing. Obviously, the compressed fees affect profitability.”

He said one of the most important recommendations is to standardize language, “to make it a lot clearer to the servicer as to what actions we can and can’t take.”

Servicing firms are also working on internal improvements, including upgrading online portals for 24/7 access by borrowers, boosting the number of customer service representatives, increasing training, assigning dedicated staff to clients, and requiring that calls and emails be answered quickly.

“It’s a very competitive world out there, and the CMBS lenders are working very hard to compete in a market that is not only driven by pricing but also better customer service,” Shamaly observed.

You’ll find more on this topic in the April 2018 issue of CPE.