Loan servicers caught short-handed as tidal wave of requests for relief hits

CMBS special servicers reduced staff in recent years as caseloads declined

Securitized commercial mortgage servicers are short-staffed as thousands of borrowers request relief (Credit: iStock)
Servicers of securitized commercial mortgages are short-staffed as thousands of borrowers seek relief (Credit: iStock)

As the volume of troubled real estate loans ebbed in recent years, servicing firms that oversee hundreds of billions of dollars in securitized commercial mortgages lowered their staff levels accordingly.

But as the Covid-19 pandemic sends thousands of borrowers seeking relief, servicers have been jolted by a tidal wave of requests for help. The number of panic-stricken borrowers of commercial mortgage-backed securities are now expected to reach levels last seen during the Great Recession, according to Fitch Ratings.

“They’re overwhelmed by a longshot,” said Ann Hambly, CEO of Texas-based 1st Service Solutions, which provides advisory services for CMBS borrowers. “It’s like they’re drinking from a firehose.”

When mortgages on commercial properties like hotels and shopping centers are packaged into securitized debt deals, there’s a framework of servicing companies to manage those loans. Primary and master servicers do the day-to-day work of keeping general tabs on properties and collecting monthly mortgage payments.

But when CMBS borrowers need to request significant help on their debt, such as forbearance, they have to go to their special servicer — and that’s a whole different ball game.

The eight largest special servicers in the country oversee nearly $580 billion worth of CMBS loans, according to the Mortgage Bankers Association, and some of them came into the global pandemic operating on staffing levels that are half of what they were just a few years ago.

“There definitely will be challenges,” said Morningstar analyst Rich Carlson, who noted that while most servicers are equipped to handle the initial spike in requests, at some point they will likely “expand their capacity.”

“I think every special servicer will tell you they’re probably going to increase their special servicing asset management staff,” he said.

The country’s largest CMBS servicer, Midland Loan Services, managed a portfolio of $177.7 billion in loans at the start of last year with a staff of 26 employees, according to figures from S&P Global Ratings. That was nearly a one-third reduction from 41 employees in 2014, even though Midland’s CMBS book grew more than 20 percent during the same period.

A representative from Midland, which is owned by PNC Bank, was not available for comment.

Others have seen more drastic cuts. Rialto Capital Advisors, the country’s second-largest CMBS special servicer, had a staff of 56 as of mid-2018. That was roughly half the number it had at the end of 2014.

Sign Up for the undefined Newsletter

By signing up, you agree to TheRealDeal Terms of Use and acknowledge the data practices in our Privacy Policy.

And LNR Partners, a subsidiary of Starwood Property Trust, saw a major reduction after it eliminated 24 jobs in 2018 as the company anticipated its workload to decline in the coming years. LNR had a staff of 168 special servicing employees in mid-2018, down nearly one third from the 242 it had three and a half years earlier.

A spokesperson for LNR declined to comment and a representative for Rialto did not respond to a request for comment.

Industry experts said LNR and other special servicers are adjusting by moving employees from other parts of the companies into their special servicing units.

“We’re coming off a timeframe when CMBS defaults have been trending down very low, and because of that we’ve seen special servicers go through normal staffing adjustments,” said Fitch analyst Adam Fox.

All the servicers Fitch covers have excess capacity and, in the best case scenario, not all requests for relief will turn into distress situations, he added.

“Our hope is that many of the more clear-cut cases of short-term forbearances will be handled [without being transferred into special servicing] in coordination with the master servicer,” Fox said.

But should a growing number of borrowers need more substantial relief like loan modifications — or go into default in the most urgent cases — they could find themselves in prickly situations with their special servicers.

The balance of power still weighs heavily in favor of the servicing firms, which have long been criticized for heavy-handed tactics and the length of time they hold onto loans. The companies collect additional fees while loans are actively in special servicing.

Some say that gives the servicers a financial incentive to keep loans in limbo for longer than needed, which is now an even bigger concern as the entire real estate industry grapples with unprecedented times.

Dustin Stolly, co-head of Newmark Knight Frank’s debt and structured finance group, said certain asset classes like hospitality — with so many hotels in the country in need of mortgage relief — could overwhelm the special servicers.

“There’s just not enough bodies, period, that have ever been set up to handle that wave of requests,” he said.