United States: The Dilemma Of The Really Annoyed Borrower

Last Updated: July 26 2017
Article by Richard D. Jones and Mia Rosati

Since my earliest days in the CRE capital markets biz, there has always been a drumbeat of grumbling from the borrower community about the annoying complexity, expense and delay of having one's loan serviced in a capital markets transaction. It's been going on forever. Like noise, like listening to Brits complaining about their weather; it's ubiquitous, apparently personally gratifying, but largely inconsequential for outcomes. The business goes on. Data indicates that as many as 60% of all new CMBS loans come from refinancing non-CMBS loans, so it's not like a structured finance ghetto here. The sell side takes comfort from the old saw that no sensible borrower would go to the CMBS window except as a last resort... like, three basis points or five bucks in extra proceeds. Ok, that's a tad too harsh and dismissive. But going to the capital markets window for lower rates, more proceeds or less recourse is entirely rational. On the other hand, the narrative about the pain through servicing in the capital markets is also real. The sell side and the servicing community are aware of borrower dissatisfaction, aware that something should be done. Efforts to do so however run into the heretofore immovable object of investor's not unreasonable enthrallment to even more control. To date, we have not found a way to square the circle. Time we did? Back in 2002, I wrote an article together with my friend, Mark Hill, called The Miranda Warnings. The article, which was published in CMSA World (we've had a lot of name changes over the last 25 years), advised borrowers about the facts of capital markets lending that they should consider when knocking on the CMBS door. I just reread it and it is still fairly relevant.

Since we wrote that article in 2002, CMBS execution has become more complex. Back in those days, pools had one special servicer, special servicers didn't get swapped around for a few bps, and there were fewer bespoke arrangements between masters, specials, primaries and control class representatives than there are today. The consequence of all that engineering, which, let's face it, is not the random tinkerings of an unengaged deity but engineering designed to meet the needs of investors, has made the borrower experience less good and borrowers crankier. With the best of intentions, if you have to ask three people whether they think a new lease is a terrific idea or not instead of one, it's gonna take more time, cost more money and create painful uncertainty.

In the great tradition of Henry V, "once more into the breach," CREFC has been focused on this issue for the past year and there is an active committee of about 20 issuers and servicers attempting to come up with ideas for streamlining the servicing process and making the servicing experience less annoying. The Committee is in the process of preparing a set of uniform standards and practices for CMBS issuers and servicers, which it anticipates releasing to the public within the next two months. The Committee has stated that its goal is to improve the borrower experience and that it is taking the concerns of borrowers extremely seriously. However, because the Committee is faced with balancing the competing needs of issuers and servicers, they are playing their cards close to the chest, so stand by.

Will any of this work in a material way? Will any of this actually make the servicing experience better for the borrowers? The jury's out. There's certainly plenty of room to make it slightly better. But then, in some circles, the question gets whispered, "do we really need to?" If the data suggested that borrower's demand is robust, then perhaps not. Uh oh, CMBS outstandings have plummeted from over $800 bb to less than $400 bb in the past decade. So I guess making the borrower experience better might not be an entirely stupid idea. Not to wax too philosophic but we ain't got much of a business if there are no borrowers. (No one needs to point out to me that without investors we don't have much of a business either, but do we have the balance right?) Is this a zero sum game where what's good for borrowers is also bad for investors and servicers, and vice versa? That is certainly true to some extent, but it's not time to give up.

We've gotten here, in some measure because borrower issues can get marginalized when the sausage making machine that is the PSA and the other documentation of a securitization gets built. The sell side and the service providers are at the table, lawyered up and loaded for bear. The borrowers are but a hovering presence. Oh yes, it's easy to say, "Remember, we actually have to make this work for the borrowers," but they're not there and therefore I think the urgency of their concerns is suppressed. That's just human nature.

It's high time we whip out the Ouija board, establish contact with the other side and figuratively bring them to the table and make all this work better for the father of the feast.

Wielding Occam's Razor, to materially improve the servicing experience we need to reduce the number of bilateral contractual consents required in the servicing structure, eliminate unanticipated fees and increase decisional spend. Easy, right? There's lots of good ideas out there. I'm hopeful that CREFC will embrace some. Could we build a two-speed servicing process? Could we treat assets with good performance differently? Could we build in fast track mechanisms for assumptions, for releases, for defeasance where the ask is clearly down the middle of the fairway? Could we create provisions that default to a yes when answers are not forthcoming, so borrowers could get on with their business? Could we all just agree that borrower paid fees all need to be scheduled and the servicing consent process needs to be more transparent so that there will be fewer bad surprises?

Again, is this a zero sum game where making the process more amiable for the borrower community hurts investors? Does it fatally impair the economics of the servicers? That can't be right. The bar can be moved and the circle can be squared, or at least it's worth a try. And kudos to CREFC and its members for trying. It seems to me there's plenty of room to make the process more linear, more rapid and more price efficient than it is right now without impairing prudent servicing. Let's bring a little common sense to the table here. Dodgy loans need more intrusive servicing and good loans need less. A step in that direction would eliminate a big reason why borrowers hate us so.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions