Europe at 'Interesting Crossroads' in Servicing.(Commercial Mortgage Backed Securities )

Europe is at an "interesting crossroads" when it comes to servicing, according to Michael Gutierrez, head of Standard & Poor's servicer evaluations group.

Mr. Gutierrez, who has been observing the market since S&P began expanding its servicing evaluations there in 1997, said during a webcast conference call that he considers the market to be similar to the United States' before the government-sponsored secondary market agencies Fannie Mae and Freddie Mac entered the market.

The S&P credit analyst said that if Europe follows the United States' example to a certain extent by continuing on its current path away from being dominated by markets in which portfolio lending prevails and toward securitization, it may want to avoid some of the U.S. market's mistakes.

Among other things, Mr. Gutierrez said he would advise European servicing market participants to think carefully about structuring their fees to make sure they are adequate for all market requirements and contingencies.

Mr. Gutierrez said the "squeeze" in U.S. residential and commercial servicing profits, particularly the latter, has been a real concern - one that he hopes the European markets will be able to avoid. He cited as an example an instance where a "highly known" manufactured housing servicer's 50-basis-point fee became inadequate when bankruptcy occurred and no replacement servicer could be found with the ability to handle that particular volume in that particular asset class. As a result, the whole deal had to be "re-engineered" with a 125-basis-point fee, he said. If fees are too low, as Mr. Gutierrez feels they are in many cases in the United States, servicers may feel pressured to, for example, impose late charges or forbearance plan fees that may or may not be "reasonable," he said.

For "certain asset classes" in the United States, there have been "extreme pressures to minimize loss severities" and loss mitigation and default management efforts "more aggressive than what regulatory landscape would allow for," Mr. Gutierrez said.

He said that has drawn regulatory attention and put even more compliance and investor reporting burdens on servicers. This has strained not only new issue U.S. securitizations, but old ones in which fees were set at a time before current ...