CMBS Loan & The Parties Involved:
As CMBS default rates continue to rise past 10%, as expected, borrowers who hold commercial real estate loans want answers. The process, which can involve many parties, many of which borrowers may not have ever heard of, can get complex, especially considering the alarming rate at which loan defaults are climbing.
In order to understand a process that can get rather confusing, we must first understand the primary parties involved in the CMBS loan approval process and what they do.
Primary Servicer
The primary servicer is the originator of the loan. It can be a bank, a life company, a mortgage banking firm. They are the ones that deal directly with the borrower.
It’s important to understand that the primary servicer is in no way authorized to make any commercial loan modifications. This means that the primary servicer literally deals with the borrower to collect monthly rents and escrow and serves as a liaison between the Master Servicer and the person or persons borrowing the money.
Master Servicer
The Master Servicer is a rated entity whose responsibility is to oversee the entire performing loan pool. Their job is to enforce the rules of the CMBS process. In addition, Master Servicers have what is known as advancing obligations. This means that it is their responsibility to keep the loan bondholders current when a loan goes into default.
Like the Primary Servicer, the Master Servicer is not authorized to make any changes or modifications to any commercial real estate loans. They are simply there as an enforcer of the loan documents.
Bondholders
The bondholders are essentially the loan investors and the process is as follows:
The pool of loans is originated, bundled up and sold together as bonds in the market. The bonds rank in the following order from the top of the list to the bottom: AAA, AA, A, BBB, BB, B and Unrated bonds, which are the controlling class of bonds because of their high-risk investment nature.
The investment cash flows from the top rated bonds all the way down in what is known as a waterfall of cash. As a result, the unrated bonds are considered the high risk loans, because they have the most potential for monetary loss.
Special Servicer
Special Servicer
Because the unrated class bondholders hold the lowest-rated bonds and are therefore the first ones to lose on a defaulted loan, they are entitled to choose the Special Servicer.
The Special Servicer is only involved in the event of a loan defaulting, and is the only party that can entertain the idea of a loan restructure or modification and the only party authorized to handle borrower requests such as assumptions.
The role of the Special Servicer is very important in the event of a non-performing loan. It is both the Master Servicer and the Primary Servicer’s responsibility to inform the Special Servicer as soon as possible about any non-performing loans so that they can look into a CMBS loan restructuring or a CMBS assumption.
CMBS Demystified
Understanding the role of each of party involved in the CMBS loan process is essential to understanding the complex world of commercial real estate investing. 1st Service Solutions, the first firm serving as a borrower advocate in loan restructuring and assumptions, has experts that will walk you through the difficulties and explain the intricacies involved in CMBS loan modifications.
Visit 1st Service Solutions today at www.1stservicesolutions.com for more information, or visit us on Facebook at http://www.facebook.com/1stServiceSolutions.