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Wells Continues to Lead Master Servicers; KeyBank Passes Midland

by CMA (Commercial Mortgage Alert) 02.09.2017

Wells Fargo again captured the majority of master-servicing contracts on commercial MBS offerings last year, while KeyBank jumped over Midland Loan Services to take second place in the annual ranking. As U.S. issuance plunged by 25% to $76 billion last year, Wells landed the master-servicing assignments on 60.6% of new deals by dollar volume, according to Commercial Mortgage Alert’s CMBS Database. That compared with 59.4% in 2015, when annual CMBS issuance hit a post-crash high of $100.9 billion.

The No. 2 and 3 players, meanwhile, switched places and virtually swapped their market shares. Key won the mandates on 19.6% of 2016 transaction volume, up from 16.6% the year before. Midland dropped to third as its share slipped to 16.2%, from 20%. Midland executive vice president Stacey Berger said its CMBS market share has moved up and down in recent years because it maintains a consistent bidding strategy even as market conditions fluctuate. The PNC unit maintains a diverse servicing portfolio tied to various types of commercial-mortgage originators. “As a result, we can afford to be more discriminating in terms of what servicing rights we buy and what we pay for them,” he said.

Loan servicing is largely a fixed-cost operation, so the CMBS sector has traditionally been dominated by a few companies that benefit from economies of scale when bidding for assignments. The three leading firms have accounted for more than 96% of the market for the past several years.

The low volume of new deals is a concern for the master servicers as the huge volume of maturing debt that was securitized before the crash continues to run off. With issuance expected to be roughly flat this year, executives at Wells, Key and Midland reiterated their commitments to pursue more master-servicing assignments from agency lenders, insurers, banks and other originators.

“If CMBS is down, we’re more than confident we’ll pick up servicing business in those other areas,” said executive vice president Marty O’Connor, Key’s head of loan servicing and asset management. “The real estate isn’t going away,” he said. “Somebody has to refinance it.”

Among other things, Wells has focused more heavily lately on servicing loans for bridge lenders and originators who finance distressed or transitional properties. As borrowers struggle to refinance legacy CMBS mortgages that are overleveraged by today’s valuations, “some of these alternative sources of financing have stepped in where others couldn’t,” said executive vice president Alan Kronovet, Wells’ head of commercial mortgage servicing. “It’s not a want of capital out there,” he added. “It’s just a matter of where it winds up.”

Meanwhile, the Federal Reserve’s recent decision to embark on a course of gradual increases in short-term interest rates could also complicate matters for CMBS master servicers. To be sure, it’s at least partly positive because rock-bottom rates have long reduced income from the interest that servicers earn on the “float” — escrows, reserves and loan payments held briefly before being forwarded to bondholders. After keeping short-term rates near zero since the crash, the Fed boosted them by 25 bp last month.

“That 25-bp rate increase is a very good thing for servicers because it goes 100% to the bottom line,” Berger said.

The servicing pros cautioned, however, that rising rates could also hurt their business by curtailing lending activity. “The biggest questions out there are: How much will rates increase and how quickly?” O’Connor said. “I’m more concerned about how rising interest rates will affect lending volume and less concerned about how it will affect our ability to bid on loan-servicing contracts.”

At mid-year 2016, Wells held $331 billion of master- and primary-servicing contracts on U.S. commercial mortgages in private-label securitizations, according to the Mortgage Bankers Association. It was followed by Midland with $151.7 billion and Key with $95.6 billion.

Wells also ranked first, with $502.2 billion of mandates, when all types of commercial mortgages were counted, including portfolio loans and agency debt, according to the MBA. Next up were Midland ($499.1 billion), Berkadia ($220.6 billion), Key ($195.4 billion) and CBRE ($108.3 billion).


2016 US REIT Admin Agencies

Rank Lender Volume (MM)(USD) Total Deals
1 Bank of America Merrill Lynch $22,210 36
2 KeyBank $15,174 34
3 Wells Fargo & Co $12,700 28
4 JP Morgan $18,691 16
5 US Bancorp $3,154 8
6 PNC Bank $1,460 7
7 SunTrust Bank $832 6
8 Capital One Financial Corp $885 5
9 Citi $4,850 3
10 Deutsche Bank AG $3,250 3
11 Regions Bank $257 3
12 Toronto Dominion Bank $4,750 2
13 Barclays $1,450 2
14 Mizuho Financial Group Inc $1,000 1
15 BNP Paribas SA $900 1
16 M&T Bank $200 1
17 BMO Capital Markets Financing Inc $175 1
18 Huntington Bancshares $65 1
19 Banco Bilbao Vizcaya Argentaria SA [BBVA] $52 1

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