Servicers Stretched as Workload Grows.

As the commercial mortgage market has matured in the last 10 years, the role of commercial servicer has become increasingly complex. It's not just about making timely principal and interest payments and managing the occasional delinquency and default anymore. There is much more to do, causing some servicers to complain that their compensation does not reflect this increased workload.

At least on the delinquency and default front, servicers have cause for cheer, with Fitch Ratings reporting that defaults on Fitch-rated commercial mortgage-backed securities fell to 0.40% in 2005, after lingering between 0.80% and 0.85% during the period 2002-2004. The credit rating agency expects the CMBS default rate to decline even further in 2007, even as more exotic property types have found their way into these deals. Fitch's prediction comes with the caveat that "CMBS default rates will be more sensitive to future economic downturns given the higher concentration of more volatile property types and assets securitized in recent CMBS vintages."

On the topic of servicing complexity, Fitch has come out with a report saying that the CMBS servicing environment is "anything but standard." Richard Carlson, Fitch senior director, reports that as loan and deal structures and the regulatory environment have become more complex, and with the development of avenues such as the commercial real estate loan collateralized debt obligation (CREL CDO), the servicing environment has changed a lot.

"Nonstandard servicing opportunities for CMBS servicers are becoming more prevalent, and come with additional covenants, trigger events and reporting requirements," Mr. Carlson notes.

"Servicers increasingly deal with third-party investors who have a say in the servicing of the loan, which makes it all the more important that the CMBS servicer is able to service the loan in a way that fulfills its duties under the servicing standard while satisfying third party investors."

On the regulatory front, the Sarbanes-Oxley Act of 2002 led to heightened scrutiny of servicers and their reporting. And the Securities and Exchange Commission came out with Regulation AB, which took effect in 2006 and regulated investor disclosures on asset-backed securities. Previous to that, SEC disclosures were geared to corporates and their securities and the growth of the ABS financing avenue prompted the SEC to come up with specific regulations for ABS disclosures.

CMBS ...