CDO Growth Creates New Servicing Opportunities.(collateralized debt obligations)

Rapid growth in the collateralized debt market also presents opportunities for commercial servicers. Commercial real estate-backed CDO issuance was at a record $20.53 billion in 2005, up 223.9% from 2004 levels, according to Wachovia Securities. And market participants expect CRE loan-backed CDO issuance to gather more steam, considering that this structure provides more flexibility for servicers to manage the loans on behalf of investors and avoid the rigidities of the REMIC format. The market trend right now, is for the transitional floating-rate loan-backed collateral that requires more servicer discretion to move to the CDO format, while the stabilized, fixed-rate-backed collateral sticks with the commercial mortgage-backed securities deals.

Rich Carlson, a director with Fitch Rating's structured finance group who is involved in CMBS servicer ratings, told Commercial Servicer that Fitch has received more inquiries in the last month from CMBS servicers regarding CDO servicing opportunities since they consider it as "additional product to supplement their servicing portfolios." He sees opportunities for servicers in this area, considering that not all issuers of CDO product have servicing capabilities in-house and often they have to hire someone to do the servicing. The opportunity he sees is for CMBS servicers to service whole loan CDOs.

Sometimes CDO issuers originate the loans and can service them for an interim period, and sometimes issuers purchase loans that already have servicers who are on a servicing contract that can be canceled if the loan is sold. Often, what happens is that after the loans are packaged, the issuer will hire a third-party servicer to do the servicing under the guidance of the issuer, according to Mr. Carlson. And if the loan is subordinate debt to a loan that has been contributed to a CMBS securitization and already has servicers attached to it, "in those cases, it is just another entity for the CMBS servicer to do additional reporting and keep in the loop."

While there is no requirement right now for the servicers of CRE loan CDOs to be rated and theoretically there are opportunities for all sorts of servicers, Mr. Carlson believes that CMBS servicers "have a leg-up on other servicers" considering that "if you already service in a securitized environment, you will be familiar already with the types of reporting that is associated with CDOs." The rating agency currently undertakes reviews of CDO servicers that are not already rated for their CMBS servicing capabilities to make sure that they have the required capabilities. Fitch often reviews servicers that are related to the CDO issuers (for instance the issuer's parent might have a group that services ...