Part 2: Finally, Loan Servicing
In Part 2 of our Three-Part Series on Loan Servicing, we continue our journey into loan servicing by broadly defining what it is. Then, we take a peek at the pooling and servicing agreement and look at a live deal.
Not going to bore you too much, here. But, I want to lay down a foundation for understanding loan servicing. We’ll finish up by looking at how this is playing out in a live deal.
Loan servicing: it all starts in the pooling and servicing agreement (PSA). The 250 – 1000+ page agreement starts with a title page identifying the players and their roles and then rolls into multiple chapters that define in detail the responsibilities of the loan servicers throughout the lifecycle of the loan.
Loan servicing refers to the operational aspects of the loan. This includes general maintenance of the loan: receiving payments, making payments, keeping records of the property, etc. The type of loan servicing required for each loan agreement is expounded upon in the PSA.
From the pooling and servicing agreement, we’ll focus on the servicing portion that includes the Master and Special Servicers.
Generally, the Master Servicer handles all of the administrative tasks associated with loan servicing. When things go awry, they call on (or appoint) a special servicer to handle the loan. This usually happens when a Special Servicing Loan Event occurs – ie., when a loan is either in default or imminent of default.
Once the loan is in the Special Servicer’s hands, the special servicer takes over the responsibility of the Master Servicer. However, the fiduciary responsibility of the special servicer is not to the borrower, rather to the investor.
In the best case scenario, the special servicer does everything in their power to make the loan current and avoid foreclosure. In case of a foreclosure, they are assigned the task of working out the loan – that’s if they elect not to exercise their right to purchase the property.
Let’s take a look at a like deal: GSMS 2015-GC34 750 Lexington Avenue
An example of a special serviced loan is 750 Lexington Ave. The $126.8 million loan was sent into special servicing (LNR Partners, LLC. is the special servicer) in October 2022 after being delinquent on its loan in September 2022. DSCR (Net Cash Flow) was 1.03x and occupancy at 71% for the 382,256 SF Class-A office and retail property in Midtown Manhattan.
There are $53 billion of CMBS loans maturing in the next two years that are at risk of default. In the next issue, we’ll hear from an industry expert about the state of the capital market and the role special servicers will play in the best and worst case scenarios.
Which asset class is most at risk of seeing large volumes of loans sent to special servicing?
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