Some CMBS special servicers are charging undisclosed fees to borrowers seeking modifications, according to Fitch Ratings. And there is concern that this may be the beginning of a trend.
This reflects some ongoing complexities of today's transitioning market, the broadest being the lack of historical precedent for the extent of the downturn and strategies like modifications used to address it.
To fill in those that may not have read the original article, here is the deal: In a new report the ratings agency said it “has been made aware of instances where modification or extension fees have been charged to the borrower, and some were far higher than expected” and not disclosed.
“The investors are not informed and that represents one of our chief issues, that being a lack of transparency and disclosure,” said Stephanie Petosa, managing director, structured finance.
The ratings agency is concerned that fees — regardless of size — could put the fiduciary duty that special servicers have to the trust and bondholders at risk.
The fees have “the potential to call into question the real rationale behind the modification or extension for which the fee was charged,” Fitch said.
This also has the potential to play into the ongoing trend toward “tranche warfare,” in which how loan resolutions play out has a lot to do with the extent of returns different type of investors in securitization structures get.
It also could play into the trend toward investor litigation in RMBS, but perhaps this is less likely because, as Fitch points out, there does not appear at the moment to be anything obvious or specific in the pooling and servicing agreements that govern CMBS to prohibit them.
While pooling and servicing agreements include some specific fee structures for special servicing — including liquidation and workout — they do not specifically disallow firms from charging ancillary fees. These fees might include modification, assumption or extension charges. Unfortunately, there is little in the way of guidelines for such fees and disclosure is not usually required, Fitch said.
“They are ancillary fees, or fees above and beyond standard pooling and servicing agreements, that are being used for loan modifications or extensions,” Petosa said.
Going forward, the ratings agency said it would examine whether ancillary fees adhere to the spirit of the documents and the servicing standard, and determine if a simple fix is to encourage special servicers to explicitly state fees charged borrowers so that investors are fully aware of them even if they don't agree with them.
Of course, these things are always easier to address going forward, which also touches on the aforementioned, overarching problem of dealing with unprecedented developments — including costs — that do not seem to have been contemplated by original agreements.
Special servicers may feel they need to cover their costs using such fees and while they may not be prohibited from doing so under the original PSAs for these “legacy” deals, they now should be on the alert that doing so has some political ramifications within the context of deals.
Likely key players in how this all plays out will be the influential private equity funds with ties to special servicers.