Fitch has taken a slightly dimmer view of Midland Loan Services’ ability to workout distressed commercial mortgages.

In a press release published Friday, the rating agency said it had cut Midland’s special servicer rating by one notch, to ‘CSS2’ from ‘CSS1’, citing the “aging of the company’s asset management system,” which it said compares less favorably to those of other special servicers that it rates and “is no longer consistent with the highest standards of servicing ability and for managing large volumes of defaulted loans.”

Fitch’s special servicer ratings range from Level 1 for those demonstrating the highest standards of overall servicing ability to Level 5 for those demonstrating limited to no proficiency in servicing ability, according to information posted on its website. It categorizes Level 2 special servicers, such as Midland, as demonstrating “high performance” in overall servicing ability.

Fitch has no issue with Midland’s ability to collect payments, managing escrow accounts, collecting and analyzing operating statements and rent rolls, performing property inspections and all other routine loan administration functions.  It left the company’s commercial master servicer rating and commercial primary servicer rating unchanged, at 'CMS1' and 'CPS1', respectively.

As of March 31, 2016, Midland, a unit of PNC Bank, was named special servicer on 236 U.S. commercial mortgage securitizations totaling $133.5 billion, and was actively specially servicing 53 securitized loans totaling $575 million and was responsible for 16 real estate-owned (repossessed) properties totaling $227 million. CMBS represents the vast majority of Midland's named special servicing portfolio.

The company is a relatively small player in the special servicing industry. By comparison, the largest player, LNR, a unit of Starwood Property Trust, had a special servicing portfolio of 662 loans totaling $9.8 billion as of the end of 2015. At that time, it was responsible for repossessed properties with an outstanding balance of $5.1 billion.

In its press release, Fitch said that Midland’s special servicer rating reflects the strong experience and tenure of asset managers, proactive surveillance of performing loans, effective internal controls, as well as the presence of policies and procedures to mitigate potential conflicts of interest with third-party clients.

But it noted that the company’s special servicing portfolio “consists exclusively of third party appointments, as neither Midland nor its parent company purchase controlling class positions in CMBS transactions.” As a third party servicer, Midland's special servicing portfolio changes due to control shifts in legacy CMBS transactions as losses are incurred. 

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