CMBS Surveillance Heightens for Commercial Servicers

Submitted by Ronald Tennant with Metrocities Mortgage:

MBA (5/19/2008 ) Murray, Michael
CHICAGO—Surveillance activity continues to increase in commercial servicing shops as staff numbers rise and information becomes a major commodity for commercial mortgage-backed securities (CMBS) investors.
“There are more people, more parties asking for more information more often,” said Leslie Fairbanks, managing director and company head of the real estate asset management group at Wachovia Securities, Charlotte, N.C., here at the Mortgage Bankers Association's Commercial/Multifamily Servicing and Technology Conference.

Fairbanks said her servicing shop is hearing from all levels of the capital stack, including investment-grade investors, and she is spending time with her internal compliance team on information they can share. “We have to be very careful with sharing information only to people who are appropriate to share it with,” she said.

“Investors are not only asking more questions, but they’re asking questions about what questions they should be asking,” said Michael Lipson, CMB, executive vice president at Capmark Finance Inc., Horsham, Pa. “In this meltdown, there is a lot of uncertainty. There are a lot of issues cropping up…in the documents themselves.”

Janice Smith, managing director of the capital markets group at Bank of America, Charlotte, N.C., said its servicing shop has access to more staff from the front end because of the capital markets shutdown.

“We have added a lot of underwriters to our asset management staff and to our surveillance staff. By being on the front end, they are not only used to the REMIC [real estate mortgage investment trust] end of it, but it’s based to parties that are only entitled to information,” Smith said. “There is a lot of compliance training, and all of them know real estate really well to understand the capital stack and investors want information. In terms of compliance and legal issues, there is a lot of extra training going on.”

“In addition to increasing size of our surveillance group, we have created a second surveillance group at the mortgage capital level,” said Catherine Rodewald, managing director at Prudential Mortgage Capital Co., and president of Prudential Asset Resources in Dallas. “We are looking at all these portfolios much more substantively in terms of what we add and what we move.”

“Internally, we are servicing and asset managing our balance sheet,” Fairbanks said. “A lot of the underwriters from origination have been drafted into asset management….so everybody who was not in management surveillance, it has become everybody’s job in our shop.”

Lipson said Capmark has not been moving people from underwriting to asset management but bringing in people familiar with workouts from the early 1990s and staff from ratings agencies, including Pamela Dent, hired to manage Capmark's Global Services Surveillance Group. Dent was a senior vice president at Moody’s Investors Service in New York, supervising the CMBS and commercial real estate collateralized debt obligation (CRE CDO) surveillance group.

Fairbanks said heightened surveillance could be the result of events in the residential subprime market to ensure it does not happen in commercial real estate.

“A lot of the additional section of surveillance, I think, is a result of that [and] that we are not going to be caught by surprise again on the commercial side so everybody is digging in and everybody is asking every question they can imagine,” Fairbanks said. “So far, that’s not what’s happening on the commercial side. There have not been so many higher delinquencies. I wonder if that continues, and as we get back to originating [CMBS] loans again, whether that’s all the attention there will be and we’ll look back…I’m just not sure how it’s going to play out.”

Smith, however, said she expects more information will be necessary in the future, probably with less panic behind it, because a fallback to less information once servicers provide more information is unlikely.

“Once we establish this benchmark, I think that’s pretty much how we are going to be going forward,” Smith said.