Servicing was once simple: Customer service, payment processing and escrow administration. Over the last few decades, due to the growing needs of CMBS investors and life companies, it has evolved into, “Yes…and…” So, what is Servicing now?
At Essex, in addition to the always critical customer service, servicing is broken up into four key categories:
- Cashiering
- Loan Administration
- Collateral Surveillance
- Asset Management
While there are tasks that fall into more than one category from time to time and there are certain functions that occur only at the beginning and end of the servicing process (e.g., new loan setup, payoff processing), these four categories cover most of what we do every day.
Cashiering
Cashiering includes billing, collecting and posting payments to the servicing system and remitting and reporting cash to clients. The automation of cashiering reduces errors and acts as a key control for Essex and its clients.
Our servicing system calculates payments due (e.g., P&I splits, additional amounts due), generates bills, and maintains detailed loan histories. That data is generated based on accurate loan setup at origination, and when principal curtailments, earnouts, and draw disbursements occur. Servicing systems generate remittance reports based on the investor’s needs. Generating remittance data from the servicing system assures accurate accounting between the servicer and the investor. Cash movement is handled electronically among all parties, including the servicer, investors, and (as often as possible) the borrowers.
The bank accounts of each party are subject to controls administered by each parties’ banks. Even with automation, the need for highly trained personnel with backgrounds in banking, accounting and finance is required.
Loan Administration
includes administering lender and borrower requirements related to property taxes, insurance, UCCs, IRS reporting, and other analytical activities. Often, servicing personnel will be required to be proficient at many, if not all, of these areas. The servicing system assists Essex in tracking key dates, lender requirements, escrow funds, and generating escrow analyses. The data assists us in generating standard IRS forms. The challenge for people handling these responsibilities is related to insurance. Due to variations in investor insurance requirements, increasingly specialized coverages and complex policies, personnel have ongoing insurance training and are often supported by our outside insurance consultants.
Collateral Surveillance
Collateral Surveillance refers to risk mitigation related to the real estate securing the loan. Key activities include operating statement and rent roll analysis and property inspections. Data related to operations is captured electronically, analyzed and reported to investors. This data allows the investor to value their investment, perform portfolio-level analysis and monitor their ongoing risk and capital needs accordingly.
Property inspection reports provide insight into the collateral’s physical condition. Property inspection reports also provide insights into tenancy, accessibility, the surrounding neighborhood and comparable assets. Deferred maintenance is noted in the report which prompts Essex to take appropriate action on our client’s behalf.
Collateral surveillance duties may be handled by our personnel, our client, their other third-party service providers or any combination thereof depending on the ultimate investor’s risk management requirements. Regardless of the mix, our personnel have specialized training in real estate, construction management and financial analysis.
Asset Management
Asset Management requires the highest level of expertise and is driven by the structure of the loan, the level of leverage and the complexity of the collateral. A low leverage loan with little structure collateralized by a fully mature property requires the least amount of expertise. A loan with higher leverage, multiple fundings, loan covenants related to collateral performance, cash management via lockbox, pre-designated collateral release provisions, and/or post-closing obligations and collateralized by properties being constructed, repositioned or subject to specialized action plans (e.g., PIPs, environmental remediation) requires the greatest level of expertise.
Like collateral surveillance activities, the investor determines the risk management plan and executes that plan through the servicer, their own personnel, specialized third-party service providers or any combination of the three. Competency related to commercial real estate, financial analysis, valuations, finance and property type-specific expertise is required.
Essex Financial Services
Essex provides all these services to life companies, mortgage banking firms, private lenders and debt funds for lending platforms originating core, bridge, construction and other high yield debt. The loans we service are collateralized by all types of commercial real estate with locations throughout the US.
For real estate debt fund managers, we complement your existing strengths, allow your dealmakers to keep making deals and reduce your servicing overhead. For mortgage brokers with no servicing platform placing deals “servicing released” we can assist you in obtaining servicing assignments with your capital providers. We help you by staying in front of your valued borrower relationships, meeting the ongoing servicing needs of your capital sources and return a healthy portion of servicing revenue to your bottom line for the life of the loan. Give us a call.
