The Care And Feeding Of Niche Loans

by Jessica Lillian
on June 25, 2008 No Comments
Categories : E-Features

When tending to a diverse portfolio of loans, commercial servicers must be aware of the special post-closing demands of niche products, including B-notes, small-balance deals and construction loans. Although basic servicing principles remain the same, numerous procedures typically applied to non-niche loans will require specific modifications, according to industry executives who spoke at the recent Mortgage Bankers Association Commercial/Multifamily Servicing and Technology Conference in Chicago.

Mezzanine pieces and B-notes themselves tend to be relatively simple to service in certain ways. The A-notes associated with them, however, may bring in a host of complications, including myriad variations in securitization. B-note servicers must therefore remain in close contact with the servicers of the A-notes to ensure data accuracy, said David Potier, vice president at Wachovia Securities.

For instance, ‘When we have to do CMSA [Commercial Mortgage Securities Association] reporting, we're relying on gathering all that information from upstream. We're not actually collecting borrowers' statements and spreading them,’ he explained, noting that the B-note servicer/A-note servicer relationship is similar to that of a subservicer and a primary servicer.

Servicers of subordinate commercial debt must maintain close ties with not only A-note servicers but also the investors involved. In contrast, the B-note servicer will not often work directly with the borrower unless a problem develops.

One exception is managing possible borrower inquiries about paying off a B-note when a property is performing well and extra proceeds have accumulated. According to Potier, although some B-notes can be prepaid without penalty, the situation becomes thornier with securitized B-notes and the real estate mortgage investment conduit (REMIC) rules surrounding them.

All of this unique treatment – particularly if the loan enters special servicing – translates into a particular need to ascertain proper pricing, added Potier. Accurate numbers are highly dependent on obtaining a thorough understanding of how much time portfolio managers and asset managers are spending on such tasks as obtaining appraisal information, speaking with the special servicer, inquiring about potential receivership and so on.

{openx:14}On the small-balance loan side, the specialized and hands-on demands of servicing this type of loan begin immediately, said Diane C. Haislip, vice president at KeyBank Real Estate Capital.

Effective small-balance loan administration must include promptly and accurately entering all information into the system so that it is readily accessible when the borrower calls. ‘The small-balance borrower tends to be much less sophisticated than your larger borrower,’ she explained. ‘They're never going to look at your Web site.’

Therefore, servicers that cannot immediately provide relevant information to these borrowers – who are likely to keep particularly close tabs on their deals given the likely inclusion of recourse – risk losing credibility. Haislip recommended assigning specific loans to staff members with skill sets matching the needs of particular borrowers.

Individual borrower education may include both loan-related instruction and property-related instruction. The servicer, meanwhile, must also closely monitor the mortgage for ‘any kind of red flag,’ she stressed, and before committing, the company should evaluate whether it is willing to devote a possibly disproportionate amount of time to watching a small loan and its corresponding borrower.

Such a close servicer-borrower relationship becomes critical if any loan complications occur, especially with the inexperienced types likely to obtain a small-balance loan. ‘One of the problems we have is that during a disaster recovery, we definitely have to get a hold of the borrower as quickly as possible to walk him through insurance issues,’ noted Haislip.

Borrowers involved with construction loans, in contrast, may be knowledgeable, but the administration of these niche loans is also likely to be extremely hands-on and labor-intensive.

‘It's very hard to standardize construction loans because they change so much over the course of the deal,’ remarked Stephen D'Arcy, head of servicing operations at Hypo Real Estate Capital Group. In the current market, where a servicer may find that a condo deal has suddenly morphed into a multifamily deal, for example, construction loans have become even more difficult to monitor. Additionally, reallocations occur frequently.

{OPENADS=zone=16}D'Arcy recommends maintaining a sense of flexibility – and soaking up as much on-site information as possible by sitting in on tech meetings and talking to borrowers, contractors and other parties involved. Periodic updates with consultants to provide pertinent industry updates have also proven extremely valuable.

Hypo Real Estate Capital Group usually assigns construction loans to staff members with a background in construction so that they can thoroughly understand engineering information and properly translate it, such as for loan-reporting purposes, he added.

E-DEALMAKERS

OR: PARKVIEW TERRACE APARTMENTS, MCMINNVILLE

WHAT: Parkview Terrace Apartments is a 46-unit garden-type apartment community built in 1974. The property comprises eight two-story apartment buildings.

WHO: Alliant Capital provided the financing.

$$$: $1,569,500.

TERMS: The loan features a six-year term and a 30-year amortization.

Alliant Capital: (800) 392-0711.

NC: FAIRVIEW PLAZA, CHARLOTTE

WHAT:
The property is a 324,028 square-foot facility containing both office and retail tenants. Major tenants include Wachovia, Nationwide Insurance and Countrywide Financial.

WHO: NorthMarq Capital Inc.'s Charlotte office arranged the financing for the borrower, Fairview Plaza Associates LP, through its correspondent relationship with AEGON USA Realty Advisors.

$$$: $3 million.

TERMS:
Financing was based on a three-year term with a 30-year amortization schedule.

NorthMarq Capital: (704) 927-4330.

Register here to receive our Latest Headlines email newsletter

Leave a Comment