The evolution of loan servicers

With lucrative work-out mandates in short supply, loan servicers are exploring alternative business lines.

The fallout of the global financial crisis kept real estate loan servicers busy in the first half of this decade, as they handled defaulted loans, often tied up in securitisations. However, with the majority of legacy non-performing CMBS loans now resolved, their business models have been forced to evolve in different directions.

Primary servicing – more precisely acting as facility and security agent on new loans as primary servicing relates to securitisation – represents the bulk of their work in the current market. “Servicers have had to broaden the services they provide,” says Eleanor Hunwicks, a partner at law firm Bryan Cave Leighton Paisner, who works with loan servicers.

“Ten years ago, those that had special servicing mandates were kept busy. Now, many are taking facility and security agent roles which lenders have tended to outsource, post-crisis, as their origination teams staffed up again but did not cover those aspects,” explains Hunwicks. “It’s more efficient to appoint an expert,” she adds.

Five years ago, CMBS loans would have comprised as much as 90 percent of some servicers’ portfolios. Today, firms such as Situs have small amounts of legacy CMBS debt on their books and a large volume of balance sheet loans – in Situs’s case, more than €42 billion.

The work involved in managing balance sheet loans includes acting as a conduit between borrowers and lenders – sometimes multiple lenders in syndicated financing deals – requesting consents and handling property substitutions or sales during the life of a loan.

Such work commands a margin of as much as 15 basis points lower than work-out situations, sources say. Security agents can expect to be paid between £5,000 and £10,000 (€5,700 and €11,400) per year, while facility agent fees depend on the size of the deal – typically 2-3bps. As such, this type of business relies on economies of scale.

“Servicing generally is not a high-margin business, so you need to have a certain volume to be able to stay afloat,” comments Clarence Dixon, global head of loan servicing at CBRE Loan Services, which has expanded assets under management by €26 billion since 2014.


In recent years, loan servicers have evolved in several ways. “Either they have grown organically; acquired or partnered other servicers; or they have been unable to prove to the market they are growing, in which case portfolios have been effectively run off,” says Dixon.

Situs’s growth has been underpinned by its acquisition of Deutsche Bank’s European CMBS loan servicing platform in 2012, which saw the transfer of €6 billion of loans. The firm also bought rival servicer Hatfield Philips from Starwood Property Trust in 2016.

Mount Street, founded in 2013, has expanded through acquisitions including Morgan Stanley Mortgage Servicing in 2014. Others also have expansion plans.Hudson Advisors, the in-house servicing and asset management unit of US private equity giant Lone Star intends to pursue third-party business in the servicing and asset management field, as well as expand into investment management.

Hudson will target its services at the likes of sovereign wealth funds investing in core and core-plus real estate in markets in which they may not have sufficient asset management capabilities. On the principal front, it will focus on whole loan investments and NPL portfolios in the US.

Captive servicers aiming to build third-party businesses face challenges, some argue. “The potential concern of some market participants is that these platforms are usually owned by private equity funds, which are involved in the same business and are therefore seen as competing with clients,” says Dixon.


Making a living from loan servicing has become more difficult, with fees driven down by competition. Sources say fees are now stabilised around 3bps to 5bps per year for performing loans. The way fees are paid has also changed: “Borrowers are now in charge of agreeing a fee with the servicer even though they work on the lender’s behalf,” says Dixon.

Pre-crisis, fees were structured as part of a lender’s margin and paid from the securitisation or deal waterfall. However, servicers’ roles have become more administrative than decision-making. “[Borrowers] will go out and get five quotes from different servicers and take the lowest,” Dixon says.

Servicers have been able to supplement low fees by diversifying into other areas of business. “As servicing fees have become lower, it’s important to have many more deals or to rely on other businesses we’re involved in, which follow the lifecycle of a loan,” says one source from the industry, who did not want to be named. The question CBRE asks clients is: ‘How can I add value to your lending platform based on the technology, processes and information I already have?’ Dixon explains.

This can involve portfolio oversight, assisting with asset reviews, fund reporting or providing loan valuations on behalf of debt funds that need portfolios revalued on a quarterly or annual basis.

The distressed and non-performing loan space is a focus for servicers, as managing such loans plays to their experience in work-out situations. Firms such as Mount Street provide due diligence and underwriting for investors’ NPL purchases as well as helping banks wind down their non-core portfolios.

Mount Street continues to manage down the former WestLB’s Spanish loan book as part of its acquisition a year ago of portfolio advisory unit EAA Portfolio Advisors, which it bought from Erste Abwicklungsanstalt.

Situs, meanwhile, offers a debt underwriting advisory service including for new origination. This complements the firm’s core business since “the advisory side is driven by the market, while servicing income is more consistent”, notes Lisa Williams, Situs’s head of Europe.

Servicers’ evolution reflects the changing make-up of their client base, with the emerging alternative lenders a natural source of demand. Some non-bank lenders are outsourcing and do not want the cost of building a servicing team.

Investment banks also continue to send work servicers’ way. Some have been outsourcing such activities for years as seen in Morgan Stanley’s servicing unit sale to Mount Street. However, most European commercial banks manage their loans internally, despite leaning on external special servicers to work-out defaulted securitised loans, post-crisis.

Mount Street is aiming to provide primary servicing on performing loan books for what it hopes will be an increasing number of banks. It is in the process of taking over a servicing contract worth $8 billion to $9 billion on behalf of Aareal Capital Corporation to support the bank’s real estate lending activities as part of a deal which saw the German bank acquire a 20 percent stake in the business last year.

“The bank has weathered the crisis extremely well and is looking for ways to optimise profit margins within its core business by looking at which services are best performed within the bank and which to bring in external parties for,” explains Mount Street’s co-founding partner, Ravi Joseph.

The contract relates to US loans initially, but the firm is in talks with several other banks in Germany and across Europe with regard to primary servicing. “It seems likely that this strategy will appeal to many other banks, as per the US market. Northern and Western European banks have recapitalised and made headway with deleveraging which puts them in a better position to look at their value chains,” Joseph says.

Servicers argue such management infrastructure does not belong in banks. They also argue the diversification of their capabilities is creating sustainable business models.

“The origination market is still active so there’s plenty of work to go around the servicers,” comments Hunwicks, of Bryan Cave Leighton Paisner. “There has been some consolidation in the industry, so there are only a handful of firms in Europe and all are quite busy,” she adds.

Who’s who in the servicing market

Loan servicers in Europe typically fall into two categories; large, institutional players, operating pan-European, and independent regional or national servicing platforms in countries such as Spain and Italy.

“Private equity firms have been buying local servicing platforms as a means of getting access to expertise and knowledge on a certain market. Some have started to buy platforms to run as a third-party servicing business in a specific region,” says Mount Street’s co-founding partner, Ravi Joseph.

The main pan-European servicers based in London include Situs, Mount Street, CBRE Loan Services and Link Asset Services. Between them, they manage EMEA commercial real estate portfolios of about £120 billion to £130 billion, estimates CBRE.

“Different servicers have pegged out different parts of the market. We compete in some areas but not as much as you would think,” says Joseph.

The return of CMBS will not generate a flood of business

The gradual return of CMBS in Europe presents an opportunity for loan servicers to win mandates. Even banks with in-house capabilities need the stamp of third-party, rated servicers for loans sold into the capital markets.

“CMBS is where we came from, so of course we have the infrastructure to manage new deals. More issuance would be welcome, but a major comeback is unlikely,” says Clarence Dixon, CBRE’s global head of loan servicing.

CMBS are unlikely to represent a main pillar of business for servicers any time soon, since issuance is still far lower than it was pre-crisis. “Our special servicing book has more or less gone, but CMBS is a cyclical business so we don’t want to lose our resources altogether,” Dixon says.

Former special servicing teams have been reallocated to loan sales advisory, including at CBRE. Last year it sold Project Stack, a €200 million Dutch commercial real estate loan portfolio, for ABN Amro and this year the €150 million Project Tambo for Spain’s Sareb, while also advising on its €10 billion Project Ebro, and the €50 million Project Selby for Bank of Ireland.