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Master Servicers for CMBS Loans: What Borrowers Need to Know
Unlike a traditional bank or credit union loan, a CMBS loan is not serviced by the lender that originated the loan. A third-party loan servicing firm, known as a master servicer, will typically take on this responsibility.
The Role of a Master Servicer in the CMBS Financing Process
Unlike a traditional bank or credit union loan, a CMBS loan is not serviced by the lender that originated the loan. A third-party loan servicing firm, known as a master servicer, will typically take on this responsibility. Master servicers will handle a borrower’s payments and any additional paperwork that is required after the loan closes. They will also generally be responsible for answering any questions that a borrower has during the term of the loan.
Master Servicers vs. Special Servicers
If a borrower defaults on their loan, the loan will generally be serviced by another third-party firm, referred to as a special servicer. Ideally, a special servicer will work to resolve the default through some type of loan modification, though this doesn’t always work out in practice. Special servicers have somewhat of a bad reputation among borrowers, as they are obligated to work in the best interests of the CMBS investors who own the debt, not the borrower. Plus, special servicers generally are paid more the longer a loan is in default, so they have little financial incentive to help a borrower get out of a sticky situation.
However, a special servicer may not be the only additional servicer assigned to a borrower’s CMBS loan; in certain situations, routine tasks and borrower communication may be handled by a third type of loan servicer, known as a primary servicer. This allows a master servicer to handle a larger volume of loans at once.
Loan Servicing Firms and CMBS Pooling and Servicing Agreements (PSAs)
Information about each loan servicing firm that a CMBS borrower may interact with (as well as each party’s rights and responsibilities) is contained in a document called a Pooling and Servicing Agreement (PSA). These documents are often hundreds of pages, and usually, contain a lot of dense legal and financial language. For this reason, borrowers need to hire expert legal counsel to review all CMBS loan documents they will sign. Otherwise, they may be signing away important rights and making themselves vulnerable to future legal and financial issues. It’s also essential to make sure that you’re working with a master servicer, special servicer, and primary servicer with a decent reputation. Due to the nature of the borrower/servicer relationship, you probably won’t get cozy, but it’s still a good idea to avoid working with disreputable firms when possible.
Related Questions
What is a master servicer in a CMBS loan?
A master servicer is responsible for servicing a CMBS loan through its entire term, unless the borrower defaults on their mortgage. Master servicers are also responsible for managing payments and interacting with the borrower on a regular basis. In some cases, day-to-day communication for a CMBS borrower may actually be handled by another type of servicer, referred to as a primary servicer. In this case, the master servicer may have several primary servicers they work with in order to service a large pool of loans. While a primary servicer can often handle smaller requests on their own, for more significant requests, they generally need the approval of the master servicer. In the case that a CMBS borrower does default on their loan, a special servicer will usually be assigned. The special servicer will determine whether the loan can be salvaged (often via a loan modification), or if the property should be sent to foreclosure.
What are the responsibilities of a master servicer in a CMBS loan?
A master servicer is responsible for handling everyday issues related to a CMBS loan, such as collecting and receiving monthly mortgage payments and required escrows, paying insurance premiums and real estate taxes, maintaining books and records, and keeping tabs on a borrower to prevent issues that could lead to a loan default. In some scenarios, a master servicer may assign a secondary servicer, known as a primary servicer, to execute many of the everyday functions that they are responsible for. Source 1 and Source 2.
What are the benefits of having a master servicer in a CMBS loan?
The primary benefit of having a master servicer in a CMBS loan is that they handle all of the borrower's payments and paperwork after the loan closes. They also answer any questions that a borrower has during the term of the loan. Additionally, having a master servicer allows the primary servicer to handle a larger volume of loans at once.
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What are the risks associated with having a master servicer in a CMBS loan?
The main risk associated with having a master servicer in a CMBS loan is that they are legally obligated to have the CMBS investors' best interests in mind, which may not necessarily be congruous with the best interests of the borrower. In addition, servicers may be dealing with hundreds (or thousands) of borrowers, so they may not have a great deal of time and attention to devote to one individual borrower. If you default on your loan, it will typically be sent to a special servicer, who may be able to adjust the terms of your debt. This could include deferring or forgiving interest or fees, or allowing the substitution of collateral. However, the special servicer works for the investors, not the borrower, so if they believe that foreclosing on the property will increase investor profits, they will almost certainly do so. In other cases, they may assist with the loan assumption process, in which another borrower would take on the CMBS debt. In general, banks and life companies are significantly more flexible when it comes to modifying loan terms when compared to CMBS.
How does a master servicer affect the terms of a CMBS loan?
A master servicer is responsible for servicing the loan through its entire term, unless the borrower defaults on their mortgage. This means that the master servicer will handle a borrower’s payments and any additional paperwork that is required after the loan closes. They will also generally be responsible for answering any questions that a borrower has during the term of the loan. In the case that a CMBS borrower does default on their loan, a special servicer will usually be assigned to determine whether the loan can be salvaged (often via a loan modification), or if the property should be sent to foreclosure.
In summary, a master servicer affects the terms of a CMBS loan by managing payments, handling additional paperwork, and answering any questions that a borrower has during the term of the loan. In the case of a default, a special servicer will be assigned to determine whether the loan can be salvaged or if the property should be sent to foreclosure.
What should borrowers consider when selecting a master servicer for a CMBS loan?
When selecting a master servicer for a CMBS loan, borrowers should consider the servicer's experience in administering conduit loans, their ability to answer questions and handle paperwork, and their flexibility in modifying loan terms in the event of a default. Unlike bank loans, borrowers will not be dealing directly with their lender after the loan has been securitized and sold to investors. Instead, they will work with a master servicer, who is responsible for collecting payments, inspecting the property, and taking care of other administrative functions. If the borrower defaults on their loan, it may be sent to a special servicer, who may be able to adjust the terms of the debt, such as deferring or forgiving interest or fees, or allowing the substitution of collateral. However, the special servicer works for the investors, not the borrower, so if they believe that foreclosing on the property will increase investor profits, they will almost certainly do so. In other cases, they may assist with the loan assumption process, in which another borrower would take on the CMBS debt. In general, banks and life companies are significantly more flexible when it comes to modifying loan terms when compared to CMBS.