Good News, Bad News for Servicers

Submitted by Ronald Tennant with Metrocities Mortgage:

MBA (5/21/2008 ) Murray, Michael
CHICAGO—There is good news and bad news for commercial/multifamily servicers: the good news is delinquencies and defaults remain historically low; the bad news is a dropoff in production volume.
Catherine Rodewald, managing director at the Dallas office of Prudential Mortgage Capital Co., and president of Prudential Asset Resources, speaking here at the Mortgage Bankers Association’s Commercial/Multifamily Servicing and Technology Conference, said the average life of commercial mortgage-backed securities (CMBS) loans is eight years and eight months.

“Operationally, I guess I would have to say that our intro-reserve dollars are up because the loans aren’t paying off, that’s good news,” Rodewald said. “The bad news is that interest rates are down, some floating income is down and the loans aren’t paying off so we have no prepayment fees.”

Prudential dropped its CMBS origination division earlier this month, Rodewald said. Delinquencies are also down with the late fees, and Prudential’s portfolio remains stable, she said.

“The traditional fee income that we all had depended on for the last eight to 10 years is not there, and we don’t know when it’s going to come back, and the basic servicing fees have been written down over that same period,” Rodewald said.

Timothy Mazzetti, CMB, executive vice president and partner at Cohen Financial, Chicago, said production is also down. Cohen Financial, as with Prudential's servicing platform, has economic concerns on LIBOR float products.

“We’re seeing a significant dip in float [income], as we are a LIBOR-based float platform and LIBOR has more than been cut in half just in the last six months,” Mazzetti said. “We are seeing a decline—we are not seeing much new business coming in on the origination side.”

Cohen Financial also acquires third-party loan servicing business; despite some success in adding new clients, no new business is coming in. “Ironically, we haven’t seen new business from them because they are not originating either,” Mazzetti said.

Mazetti noted another irony, a dichotomy that compared to subprime residential loans: Cohen Financial's portfolio consists of 800 loans without a 30-day delinquency.

"While our watchlist has increased, obviously I think part of that is a result of the increase in surveillance, we still have not yet received what has been in our industry expected increases in defaults and delinquencies," Mazzetti said.

Cohen Financial, however, was fortunate to have time to go through the “task” of becoming a recently approved rated servicer. “That process is pretty intense, especially the first time out of the blocks, which it was for us,” Mazzetti said. “We needed that time to review our policies and procedures to get ready and get through the ratings agency process.”

For Charlotte, N.C.-based Granbridge Real Estate Capital LLC, a slowdown may have also come at the right time as the firm continues to adjust to the consolidation by the BB&T Corp. of Laureate Capital and Collateral Real Estate Capital.

Russell Richardson, CMB, head of asset management and co-manager of loan administration at Grandbridge Real Estate Capital, said one challenge is to get onto a single platform.

“We are still getting all the past portfolios onto the system,” Richardson said. “That’s big for us right now. That helps explain why, selfishly, on our half of the business—we are enjoying the slowdown right now because we need to consolidate for our long term. That having been said, our portfolio continues to grow each month...primarily driven by our agency production. CMBS—obviously over the last two or three years that was probably 40 percent of our annual production—has gone now, but in terms of dollars, we are still above target doing large agency transactions.”

Richardson added that Grandbridge Real Estate Capital delinquencies and defaults are at historic lows without any evidence of a downturn in the portfolio. “Our merger was not driven by the need to put the two together and cut back the staff,” he said. “We now have the blessing of having 75 real estate professionals to reallocate for any challenges in our servicing portfolio.”

Like Richardson, Robert Vestewig, managing director at GEMSA Loan Services LP, Houston, and managing director and senior vice president at CBRE Melody and Co., Houston, said agency business, including Freddie Mac Program Plus and Fannie Mae Delegated and Underwriting and Servicing, is helping otherwise falling production.

Vestewig said defaults remain low and partner GE Real Estate, Stamford, Conn., is producing large one-off deals for GEMSA servicing, including a $1 billion portfolio purchase and $4 billion in loan purchases from the United Kingdom.

“I don't think that GE's activity is going to help offset the slowness generally in the origination market, but it’s helping us keep our head above water,” Vestewig said. “It's been better."