by Pamela Dent, CFA, CPA, Senior Director of Multifamily Special Servicing, Freddie Mac
Everyone works to a different standard – or so it is said. This is surely the case when it comes to the level of customer service that borrowers receive on performing loan post funding requests in securitizations. And it’s an industry-wide issue that Freddie Mac Multifamily has been working to address. Our belief is that for borrowers to continue to choose securitization, they need a single Servicing Standard, or certainly a set of very few, with proactive management of post funding requests throughout the life of the loan.
Good credit decisions do not have to necessitate long turnaround times. All post funding credit decisions on loans should be timely, adhere to current underwriting and servicing standards and be transparent to all in the process. But it became evident to Freddie Mac Multifamily that significant process improvements were necessary in order to meet the timeliness standard that our borrowers have come to expect. This article details the process improvements and timing metrics that Freddie Mac Multifamily has implemented, both on its retained portfolio and within the securitization program in 2014. And we think our approach might solve for a problem that otherwise will limit the use of securitization in the multifamily mortgage market and, as a result, the amount of liquidity available to support the nationwide growth in rental housing.
As background, the Freddie Mac K-Deal securitization program commenced in 2009 during the financial crisis when borrowers were finding it difficult to finance multifamily properties due to limited liquidity in the marketplace. As volume steadily grew in recent years, Freddie Mac borrowers quickly began to appeal to Freddie Mac regarding inconsistent post-securitization service levels and credit standards across servicing platforms. It became apparent that it was not only necessary to have a shared set of servicing standards for loans purchased by Freddie Mac, but also to know as much about the status of post-securitization matters as Freddie Mac knows about its balance sheet portfolio. While it is relatively easy to track retained portfolio post funding activity, it was virtually impossible to know the status of every post funding matter on Freddie Mac securitized loans without making swift, fundamental changes to the process. Monitoring the securitized portfolio has become as critical to Freddie Mac as excellent service is integral to our brand.
Freddie Mac’s securitized volume now exceeds its retained portfolio. As of August 2014 the securitized portfolio, including those loans held for sale and designated for securitization, amounted to approximately $76.0 billion compared to the held for investment portfolio of approximately $70.0 billion. Through August 2014, 65 K-Deal transactions have closed amounting to an original principal balance of approximately $81.6 billion in combined issuance (4,490 loans). Performance is strong. As of the August 2014 reporting date, 99.98% of the K-Deal loans are current and there is only one 90+ day delinquent loan, representing 1 basis point of outstanding principal. There have been minimal losses of $5.4 million with no credit losses on K-Deal guarantees since inception of the program.
Freddie Mac borrowers expect that “service after the sale” be excellent and that there should be no discernable difference in service between a portfolio execution and securitization execution. Because about 90% of Freddie Mac’s new purchase volume is securitized, with essentially only specialized structure loans remaining on the balance sheet, vast process improvements were implemented to ensure that our borrowers are provided the same level of service that they have come to expect and deserve.
To facilitate this process transformation, Freddie Mac has developed and continued to refine its Servicing Standard, which we detail in the Seller/Servicer Guide and incorporate into each K-Deal Pooling & Serving Agreement (“PSA”). The Servicing Standard ensures transparency and on-going communication among all post-securitization transaction parties. By fostering partnership among all of the servicing parties, the Freddie Mac brand is protected and the borrower experience more closely matches that of the balance sheet experience. While Freddie Mac is not a credit decision maker for its securitized loans, we are closely monitoring all consent request activity to verify that decisions made are in accordance with the Freddie Mac Servicing Standard. Post-securitization parties use the Freddie Mac loan documents and Seller/Servicer Guide as their reference point for reviewing and approving transactions. With servicing parties collaborating and communicating more effectively with each other and with Freddie Mac, we are successfully facilitating customer satisfaction and working together to ensure the ongoing strength of the Freddie Mac brand.
For assumptions and ownership transfers, the turnaround time goal Freddie Mac has established is 30 days, measured from the Primary Servicer’s receipt of a complete package from the Borrower to the issuance of a decision letter from the Primary Servicer. Because multiple parties must approve any given matter, the use of best practices, coordination and standardization are key. Given the aggressive goal of a 30-day turnaround for assumptions, it was necessary to make wholesale changes to the process and to obtain input and buy-in from all of the servicing parties.
Particular focus is given to assumptions and ownership transfers as they are the most complex and time sensitive, given binding sales contracts with huge financial implications for breach of contract. That said, all borrower requests are important and, consequently, Freddie Mac’s best practices apply to all types of consents, with service goals of 30 days for all “complex” consent requests and 15 days for “routine” matters.
Consent Request Tracker
In late 2011, Freddie Mac developed the Consent Request Tracker (“CRT”) to enable all servicers to have visibility into the consent request process for any request for which they have a role. CRT is a web based tool that allows Freddie Mac and the servicers to track the progress and issues (credit or legal) with any given borrower matter. It is both a workflow tool and a reporting tool for management. The tool tracks the request’s journey from party to party and there are comments fields for informational updates. The servicing parties update the tracker in real time, providing the most recent status and relevant commentary for the benefit of all other decision makers.
CRT began as a rudimentary, shared pipeline report and has since been enhanced multiple times each year with additional business rules, reporting capabilities and data integrity controls. As a result, over time CRT continues to become more robust, comprehensive and interactive. The tool includes critical dates that measure the amount of time each step in the process is taking, and it clearly identifies where delays occur. Currently, no other tool exists in securitization that allows multiple servicing parties to simultaneously track where any given deal is in the process.
As a result of the last round of CRT enhancements released at year-end 2014, users have a comprehensive dashboard that quickly shows them workflow at either the entity level or by individual user. It also provided flexible sorting capabilities, allowing users to view their work load in a wide variety of ways, including aging, request type, and more. With this version, CRT has become a more powerful and effective shared pipeline management tool, thanks in large part to its adoption by the Freddie Mac servicing community.
In 2014, Freddie Mac has continued to reduce any remaining differences between processes for portfolio and securitized loans, with a keen focus on service level, quality of work, and the borrower’s overall experience. The Freddie Mac Multifamily Seller/Servicer Guide is continually updated as new initiatives are adopted. Freddie Mac, in collaboration with each of the Master Servicers for its securitizations, has redeveloped Freddie Mac’s comprehensive, standard forms for consent requests to facilitate their adoption post securitization. The servicers have agreed to utilize these forms, bringing much needed standardization to the process. For large deals that cross multiple securitizations and the portfolio, Freddie Mac has instituted kick-off calls and ongoing check-ins for all servicing parties. Where appropriate, streamlined submissions have been orchestrated with one servicer taking the lead on preparing the credit analysis. The single law firm approach was first instituted with large transactions but as discussed below now applies to all transactions regardless of size.
In order to achieve our aggressive turnaround times for “best in class” service, the following significant process changes have been made to the Freddie Mac Servicing Standard:
Chief Servicing Officer. Each primary servicer must designate a Chief Servicing Officer to attest to each consent request package regarding quality, completeness and adherence to the Servicing Standard. This allows the Master Servicers to utilize a “bank credit committee” model for review while reducing the number of additional information requests between the Primary Servicer and Master Servicer or Freddie Mac (in the case of portfolio loans). In effect, this role serves as a quality control measure and ultimately contributes to timeliness as the Master Servicer (and Freddie Mac) has a high quality, complete package to consider for approval.
Streamlined Package Review Process. For securitizations closing in September 2014 and later, the Borrower consent packages will bypass the Special Servicer and go directly to the Directing Certificateholder (“DCH”). Omitting the Special Servicer removes considerable time from the process and gets the borrower’s request to the ultimate decision maker more quickly. Should any given DCH desire the Special Servicer’s evaluation and input, it is the DCH’s obligation to compensate the Special Servicer for the review and to provide a timely decision to the Master Servicer, generally within 5 days. This is no way impedes the Special Servicer’s duties or compensation with respect to non-performing loans.
Legal Best Practices. The Servicing Standard now includes legal best practices. A single law firm is now responsible for virtually all borrower requests requiring legal review. This eliminates the additional time and cost involved with multiple law firms representing individual servicing parties and instead allows one law firm to represent the interests of the trust. Also, with the proposed Borrower’s consent, Freddie Mac will provide the most recent Borrower document modifications to the Servicer’s counsel at the beginning of a transaction request. This allows the Borrower to request its standard Freddie Mac loan document modifications during the assumption process without the need to continually re-negotiate what has been obtained at previous loan originations. These two legal best practices have significantly shortened the review timeline.
New Fee Structure. In response to Borrower feedback, small post funding request fees have been eliminated beginning with September 2014 securitizations, with Freddie Mac making up the difference to the servicing parties with additional servicing compensation. This additional cost to Freddie Mac is offset by increased customer satisfaction. Assumption and defeasance fees remain but they are reasonable, compensate for the service provided and in the case of assumptions are capped at $250,000. Review fees are standardized and apply only to transactions requiring significant servicer involvement.
Guidance Requests. Freddie Mac’s Asset Management staff is available to provide guidance on the Servicing Standard and a formal process has been designed to allow the servicers to consult with Freddie Mac on any matter that is unclear or debatable. Freddie Mac provides extremely quick feedback, which allows the servicer to more fully understand Freddie Mac’s approach to the servicing standards and to incorporate that approach into its analysis.
Multi-loan Requests. In addition to providing consent request guidance as requested on securitized loans, Freddie Mac’s Asset Management staff also plays an important role in facilitating large, complex requests that involve loans in multiple securitizations, as well as on Freddie Mac’s balance sheet or in its warehouse. In these instances, Freddie Mac has stepped into an active “quarterback” role, facilitating open and ongoing communication regarding the request, overseeing a shared time line, and supporting package streamlining as appropriate. These efforts have resulted in efficient management of otherwise unwieldy requests and have produced very satisfied borrowers.
There are many features of the Freddie Mac securitization program that make it a desirable financing and investment alternative. Happy borrowers are integral to the ongoing growth of the program as their satisfaction dictates its ultimate success. And that is true not just for our securitization program, but anyone else’s. We have been first in the space of using a servicing standard to drive growth in our securitization program. The broader industry could benefit from a similar approach utilizing the best practices outlined in this article.