Lending Advice
by Mark Levine
Have you heard the joke about the loan service provider? He once said, “Service is our middle name.” If you’ve ever had to work with one of the major third-party loan services, you might get the joke. If you haven’t, the joke is that loan services have developed a reputation for providing anything but service. Sure, they provide a necessary role in the mortgage process, but somehow along the way the most important person in the process—the borrower—has been forgotten.
For those of you who haven’t had the experience of trying to get something approved by a loan service, I will give you an idea of what you’re missing. Let’s say that you have obtained a 10-year, fixed-rate mortgage on your 50-unit apartment building. In the third year of the mortgage, you decide that occupancy is tight, demand is high and rents are up, so you’d like to develop another 10 units in an empty corner of the same property. You’re not blocking any views or eliminating any amenities or roadways, so there’s no reason that you shouldn’t be permitted to perform this improvement. In fact, you should probably be encouraged to make the changes, right? Not necessarily.
First of all, unless you obtained prior approval for this addition when the loan was originated (which I highly recommend), you must consult your service. It is a material change to the property, and your loan documents undoubtedly require you to get approval for material changes. That part is fair. What might not seem fair, however, is that the process is not a slam dunk, even though your requested changes will add value and cash flow to your property. Without getting into details, because they certainly vary for every case, the minimum amount of work to get this approval would include detailed written descriptions of the proposed improvements, several phone calls to move the process along, and an unknown monetary cost for legal and administrative work.
That’s if everything goes exactly according to plan. Unfortunately, there are way too many cases when the process doesn’t go according to plan. Sometimes getting an approval requires much more work, including many calls to various people at the original lender, the loan service and various attorneys on all sides of the discussion. Sometimes it also requires a significant amount of money for documentation, legal fees and administrative hang-ups. And in the worst-case scenario, after all of this work and cost, sometimes the changes get completely rejected. At that point your mobile phone probably gets punted into the nearest wall, resulting in yet another major expense!
Why do loan services do this? Do they get paid to make your life miserable? Of course not, they only get a slight bonus for that. I am joking, of course; I have many friends in the servicing business, and I have come to respect the fact that they are in a very difficult position. Their primary role in the mortgage business is to protect the trust, or the pool of mortgages sold to investors. These investors have purchased mortgages based on a certain set of criteria, and they rely on the service to ensure that these criteria do not get compromised during the life of the loans. If a loan service fails to do this job, and if the subject loan goes bad, the loan service can actually be held liable for any losses incurred. So, in the absence of pressure from the borrower, since there is usually no existing relationship there, services will tend to focus on protecting investors.
While the loan service has the obligation to the investors, they actually do care about making life reasonable for borrowers at the same time. I wouldn’t go so far as to say that the loan service truly and directly wants to make Mr. and Mrs. San Francisco Borrower happy with their service. After all, the borrower isn’t directly paying for the service and the borrower has no influence on whether or not that service gets more business in the future. However, your lender is generally the one who hires the loan service on each deal, so loan services have a significant interest in keeping the lenders happy. Hopefully your lender is in the business of trying to keep you, the borrower, happy. Using a loose interpretation of the transitive property I learned about in ninth grade math class, we can deduce that you at least have some input, assuming you are vocal to your lender and they are vocal to their potential service.
What can you do to make your life easier? Fortunately, my friends, that is where I can share some useful tips. For starters, follow my advice above: be vocal to your lender. Although a bank or other source of your debt might seem like an infinite maze of bureaucracy, you might be surprised at how well employees communicate these days. At least from my experience, when you tell your loan officer or relationship manager that you are unhappy with Servicer X, that message quickly arrives on the desk of the banker making servicing decisions. If you’re working with a good lender, two things will happen. First, the banker will contact the service and will help you resolve your issues. There is no guarantee that all requests get accepted, but the banker should be able to help get you to a reasonable conclusion within a reasonable time frame. Second, the lender really might think twice about using that service on future deals, thus saving you some possible headaches on future business.
Do you want even more power over the situation? Up to now, I have inferred that all services are working for an outside company, separate from your lender. That’s not always true. Many firms, including most private mortgage companies, local banks and insurance companies actually service their own loans. You have the power to choose your lender based on how they service loans. It’s a perfectly legitimate question for you to ask of your lender, and I don’t recommend borrowing money without understanding who will be servicing the loan. Before going further, for purposes of full disclosure, I am currently employed by a company that services its own loans. Yes, I am therefore biased, but I feel that I can view the topic objectively since I have experienced loan servicing from several different seats.
A few questions might be coming to mind now that I have introduced the concept of lenders servicing their own loans. Why do some lenders outsource their servicing while others do not? Why would I ever borrow money from someone who doesn’t have their own servicing? Is there a tradeoff?
Like most things in the wide world of finance, it comes down to cold, hard cash. A servicing platform costs money to develop and maintain. A large technology investment is required to keep track of billions of dollars in loans, including the billing process, the monthly mortgage payments and the passing of these collections to the investors. Even more significantly, perhaps, there is the major cost of employees to manage all of the data and to answer your phone calls. While there is some profitability in performing the servicing function, the margins are generally too low for the large investment banks to justify the expense. Smaller lenders, however, tend to justify it because they have a strict focus on customer service and they want to maintain the invaluable relationships with their borrowers.
If the service is so much better at smaller, more local lenders, why go to the firms that outsource servicing? Dare to guess? Cold, hard cash, once again. Because most of the larger firms don’t have the expense of running a servicing platform, they are sometimes able to offer lower interest rates and fees. Like everything in this world, there are exceptions to the rule; but, in general, firms who outsource several aspects of the loan process are able to offer the lowest interest rates.
Therefore, it becomes a tradeoff to you, the borrower. Are you seeking the lowest possible interest rate and willing to sacrifice customer service when you need it down the road? Or are you willing to pay a slightly higher rate for the knowledge that your lender will be there to answer the phones and respond to requests? The answer is truly a personal one and certainly there are many borrowers who feel strongly about one strategy or the other. In an ideal world, your lender will offer extremely low rates and still service its own loans, but most people aren’t that lucky.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or San Francisco Apartment Magazine. Mark Levine is a vice president in the San Francisco office of ARCS Commercial Mortgage. He can be reached at 415-981-9700 or Mark_Levine@arcscommercial.com. Copyright © 2006 by San Francisco Apartment Magazine. All rights reserved.