Commercial Mortgage Backed Securities origination is down over the past year. That is according to Ann Hambly, founder and CEO of 1^st Service Solutions. According to Hambly, although there are several regulatory and market forces contributing to the decline, overall borrower frustration with the CMBS product is also a factor.

“Several industry participants have been calling attention to these borrower concerns over the last year” explains Hambly. “So much so, that the CRE Financial Council has set up a task force to address the concerns. One of the most critical voices required to really address the issue is the borrower's voice and yet, borrowers are not being included in these industry task forces.”

In the exclusive commentary below, 1^st Service Solutions' Hambly, summarizes the biggest changes that are needed to improve the borrower's experience after closing on a CMBS loan. The views expressed below are Hambly's own.

Communication between servicer(s)/ approval parties and borrowers on performing loans
1. When a borrower is attempting to obtain approvals that require the consent of the special servicer, the borrower should be able to speak to the special servicer (even if the loan is performing). Often the master servicer becomes the “messenger” of conditions (even if/when the master servicer does not agree with the conditions or can't explain the rationale behind them). It can seem at times that the final decision maker is sitting behind a black curtain, which causes much of the stress in a CMBS transaction.
2. When special servicers perform the underwriting on an assumption, and thereby, become the main point of contact for the buyer and seller throughout the process, the buyer should be able to speak to the special servicer. Many special servicers will not have any dialogue with a buyer because “they are not the borrower”. Because the conditions placed on the approval are often negotiated, this stance results in buyer's counsel negotiating with servicer's counsel and therefore driving up the legal fees on the transaction. Not to mention, the communication in this scenario is very inefficient.
Re-underwriting of a loan at time of assumption
1. Most buyers are aware of the fact they will need to 'replenish' reserves at the time of an assumption, but many conditions and reserves are making it difficult for a borrower to sell his property to anyone. Many investment sales brokers know this and won't take listings if there is a CMBS loan in place. Some examples of the types of conditions/reserves causing this are:
  1. Requiring the “Loan to Purchase” ratio to be equal or less than the origination LTV. The real problem with this is that any additional funds required to “buy down” the LTP are not used to pay down the loan, but rather held in a collateral account through maturity. This can severely impact the ROI to the buyer and creates a scenario where the buyer cannot sell the property
  2. Excessive rollover reserves on newly originated, low LTV, fully performing loans. The reserves are calculated assuming a lease term of 5 years, so often it is assumed tenants will roll twice in the lifetime of the loan.
2. Excessive fees not anticipated at origination
  1. Borrowers understand the need for a servicer to charge fees. The rub comes into play when the fees are clearly not what was anticipated at loan origination and the loan documents are silent on the 'issue'. Here are two of the biggest fees seen lately:
    1. 5% late fee on the entire balloon payment for missing maturity date by days.
    2. 1% liquidation fee on entire balloon payment for missing maturity date by days. There have been many instances when a 30-day forbearance was requested of the master servicer to facilitate a payoff of the loan within a few weeks of the maturity date. The master servicer denies the request and sends the loan to special servicing. The next step is for a payoff statement to be issued so the loan can pay off. In that payoff statement is a 1% liquidation fee, a 5% late fee on the balloon payment and default interest.
  2. Communication between special servicer and borrowers on non-performing loans
    1. Once a borrower signs a Pre-Negotiation letter and a reasonable resolution proposal has been submitted to the special servicer, it would be much more effective for the special servicer to engage in a dialogue with the borrower about the resolution proposal and/or provide feedback. Most often, the borrower only receives a “Rejection Letter” and is met with a refusal to discuss how to resolve solution in a satisfactory manner.
    2. In some cases, the special servicer does not respond to a reasonable resolution proposal at all and simply forecloses on the property with no feedback to the borrower at all. As a borrower advocate, you come to understand that there is simply no way to help a borrower at all, regardless of the solution they offer, if you have a particular asset manager at a particular special servicing shop (and there are numerous of these actors).
    3. Often, when a special servicer will engage in a dialogue with the borrower (or its advocate), the conversation is like the game of Marco Polo. The only feedback given is whether the last proposal was “hot, cold or warm”. It becomes a guessing game with no clear feedback from the special servicer. It is then up to the borrower to re-submit a different proposal, which is hopefully closer to what the special servicer will entertain. And that process continues until a proposal is submitted that works. Borrowers refer to this as “one-sided” negotiation and is one of the biggest complaints of borrowers, especially when the borrower is interested in resolving and has new capital to deploy on the resolution.
  3. Silence shouldn't mean “no”
    1. Even though it is best to anticipate all potential property changes for the life of the loan and build all that into the initial loan documents, there will always be some changes that are best for the property that were not anticipated at origination. Many servicers take a hardline stance of “if it isn't allowed for in the loan documents, you can't do it.”. That stance ultimately causes a lot of borrower dissatisfaction in CMBS and has also led to some lawsuits. Here are some of the common instances where borrowers have been told “no” without a willingness to even consider the request; all because the loan documents were silent on the issue.
      1. Addition of mezzanine debt. In some cases, the addition of the mezzanine debt would have caused the loan to not default, and without the mezzanine funds, the loan did default.
      2. Release of an out-parcel. In some cases, the release of the parcel would benefit the property overall.

Allowing the use of reserve funds for something other than originally specified in the loan documents. Again, there are times where the use of the reserve funds would have been a good decision for the property and the trust.

Communication between servicer(s)/ approval parties and borrowers on performing loans
1. When a borrower is attempting to obtain approvals that require the consent of the special servicer, the borrower should be able to speak to the special servicer (even if the loan is performing). Often the master servicer becomes the “messenger” of conditions (even if/when the master servicer does not agree with the conditions or can't explain the rationale behind them). It can seem at times that the final decision maker is sitting behind a black curtain, which causes much of the stress in a CMBS transaction.
2. When special servicers perform the underwriting on an assumption, and thereby, become the main point of contact for the buyer and seller throughout the process, the buyer should be able to speak to the special servicer. Many special servicers will not have any dialogue with a buyer because “they are not the borrower”. Because the conditions placed on the approval are often negotiated, this stance results in buyer's counsel negotiating with servicer's counsel and therefore driving up the legal fees on the transaction. Not to mention, the communication in this scenario is very inefficient.
Re-underwriting of a loan at time of assumption
1. Most buyers are aware of the fact they will need to 'replenish' reserves at the time of an assumption, but many conditions and reserves are making it difficult for a borrower to sell his property to anyone. Many investment sales brokers know this and won't take listings if there is a CMBS loan in place. Some examples of the types of conditions/reserves causing this are:
  1. Requiring the “Loan to Purchase” ratio to be equal or less than the origination LTV. The real problem with this is that any additional funds required to “buy down” the LTP are not used to pay down the loan, but rather held in a collateral account through maturity. This can severely impact the ROI to the buyer and creates a scenario where the buyer cannot sell the property
  2. Excessive rollover reserves on newly originated, low LTV, fully performing loans. The reserves are calculated assuming a lease term of 5 years, so often it is assumed tenants will roll twice in the lifetime of the loan.
2. Excessive fees not anticipated at origination
  1. Borrowers understand the need for a servicer to charge fees. The rub comes into play when the fees are clearly not what was anticipated at loan origination and the loan documents are silent on the 'issue'. Here are two of the biggest fees seen lately:
    1. 5% late fee on the entire balloon payment for missing maturity date by days.
    2. 1% liquidation fee on entire balloon payment for missing maturity date by days. There have been many instances when a 30-day forbearance was requested of the master servicer to facilitate a payoff of the loan within a few weeks of the maturity date. The master servicer denies the request and sends the loan to special servicing. The next step is for a payoff statement to be issued so the loan can pay off. In that payoff statement is a 1% liquidation fee, a 5% late fee on the balloon payment and default interest.
  2. Communication between special servicer and borrowers on non-performing loans
    1. Once a borrower signs a Pre-Negotiation letter and a reasonable resolution proposal has been submitted to the special servicer, it would be much more effective for the special servicer to engage in a dialogue with the borrower about the resolution proposal and/or provide feedback. Most often, the borrower only receives a “Rejection Letter” and is met with a refusal to discuss how to resolve solution in a satisfactory manner.
    2. In some cases, the special servicer does not respond to a reasonable resolution proposal at all and simply forecloses on the property with no feedback to the borrower at all. As a borrower advocate, you come to understand that there is simply no way to help a borrower at all, regardless of the solution they offer, if you have a particular asset manager at a particular special servicing shop (and there are numerous of these actors).
    3. Often, when a special servicer will engage in a dialogue with the borrower (or its advocate), the conversation is like the game of Marco Polo. The only feedback given is whether the last proposal was “hot, cold or warm”. It becomes a guessing game with no clear feedback from the special servicer. It is then up to the borrower to re-submit a different proposal, which is hopefully closer to what the special servicer will entertain. And that process continues until a proposal is submitted that works. Borrowers refer to this as “one-sided” negotiation and is one of the biggest complaints of borrowers, especially when the borrower is interested in resolving and has new capital to deploy on the resolution.
  3. Silence shouldn't mean “no”
    1. Even though it is best to anticipate all potential property changes for the life of the loan and build all that into the initial loan documents, there will always be some changes that are best for the property that were not anticipated at origination. Many servicers take a hardline stance of “if it isn't allowed for in the loan documents, you can't do it.”. That stance ultimately causes a lot of borrower dissatisfaction in CMBS and has also led to some lawsuits. Here are some of the common instances where borrowers have been told “no” without a willingness to even consider the request; all because the loan documents were silent on the issue.
      1. Addition of mezzanine debt. In some cases, the addition of the mezzanine debt would have caused the loan to not default, and without the mezzanine funds, the loan did default.
      2. Release of an out-parcel. In some cases, the release of the parcel would benefit the property overall.

Allowing the use of reserve funds for something other than originally specified in the loan documents. Again, there are times where the use of the reserve funds would have been a good decision for the property and the trust.

Instant Insights /

Changes Needed to Improve Borrower Experience With CMBS (Post-Closing)

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