Fee for services--an option worth considering.

Author:Lipson, Michael

The record production of commercial mortgage loans in 2005 is expected to be followed by similar origination volume in the next few years as current commercial mortgage balloon loans mature and require refinancing. For commercial mortgage loan servicers and lenders, this increased production is welcome, but poses challenges.

The increased loan volume--coupled with complexity of loan and servicing terms, investor requests for additional information and access to data, and the continuing need to focus attention on borrower services--will further stress the servicing environment. Factor into the situation compressed servicing-fee margins and the added oversight of Regulation AB, and it's easy to understand why servicers are searching for more efficient and less costly means of providing outstanding service.

An efficient cost structure achieved through economies of scale in loan administration functions, compliance and technology will be critical to allowing servicers to maintain and direct a high-quality client service operation. A variety of small third-party vendor services, subservicing relationships and other arrangements have developed to assist in achieving this efficient cost structure. While these arrangements may be effective as an extension of an in-house servicing shop, they are generally limited to discrete functions and do not provide the overall servicing expertise available from a rated commercial mortgage loan servicer or the scale to achieve significant cost savings.

Servicing comprises a number of day-to-day activities to ensure that investor and borrower rights are protected and obligations are enforced. Efficient servicing operations generally differentiate among the administrative functions, property surveillance and the customer focus. Detailed administrative functions are often the tasks that can be readily contracted to large third-party service providers to drive economies of scale, although some institutional investors use large third-party servicers to manage portions of the property surveillance and customer relationship as well.

As institutional investors, banks and smaller servicing shops face the challenge of containing costs, proactively managing portfolios and maintaining or improving quality and customer focus, it may make sense to take a look at the servicing arrangements that life insurance companies have with their correspondents. For years, life insurance companies have taken advantage of third-party...

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