DBRS Morningstar Confirms Midland Loan Services’ Commercial Mortgage Servicer Rankings; Changes Trend for Primary Servicer Ranking to Positive from Stable

DBRS, Inc. (DBRS Morningstar) confirmed its MOR CS2 commercial mortgage primary servicer and master servicer rankings and its MOR CS1 special servicer ranking for Midland Loan Services, a division of PNC Bank, N.A. (Midland or the Company). DBRS Morningstar also changed the trend for the primary servicer ranking to Positive from Stable. The trends for the master and special servicer rankings remain Stable.

As one of the largest-volume commercial mortgage servicers, Midland has solid management and professional depth, thorough asset administration, a comprehensive audit regimen, and highly effective technology for its diverse and complex portfolio. To support various servicing tasks, the Company has expanded its use of vendors over the past year as well.

To increase operating synergies and address retirements and other departures, the Company made several leadership changes this year by transferring and/or elevating long-tenured managers into new roles. These changes, among others, included a new head for Midland, a newly created chief operating officer position, new managers for asset management and special servicing, and a new head of investor reporting.

During the past year, Midland lowered its employee workload ratio for primary/master servicing through hiring, outsourcing, and redeploying staff after a large outbound portfolio transfer. Employee turnover in 2020 also moderated, although it has edged upward in recent months. Additionally, the Company implemented procedural refinements and rolled out substantial technology enhancements collectively aimed to boost efficiency and enhance controls. Concurrently, all servicing audits since mid-2020 have been rated as satisfactory.

Midland is proficient with the reporting requirements for commercial mortgage-backed securities (CMBS) and many other transaction types. Although the Company continues to incur some CMBS reporting/remittance errors, it has resolved the issues promptly and their frequency is low relative to total processing volume. As a master servicer, Midland has controlled practices for advancing and determining recoverability. Earlier this year, the Company’s advancing actions on a CMBS loan forbearance came under some scrutiny. However, it has since revised its approach. Midland also has sound subservicer oversight. The Coronavirus Disease (COVID-19) pandemic has caused Midland to suspend onsite audits and conduct only desktop reviews for all subservicers, although the Company has not added virtual meetings for any of these reviews.

As a special servicer, Midland has well experienced leadership and asset managers. It has strong procedures and controls, as well as a robust asset management application, to govern workflows, analytics, and resolution decisions. In 2020, Midland promptly added staff to address the surge in loan transfers associated with the pandemic while extending its successful asset resolution record. It continues to demonstrate reasonable workload ratios for its still high asset volume.

The Positive trend for primary servicing recognizes Midland’s moderating employee turnover in 2020, lower workload ratios, substantial technology advancements, and improved audit results. DBRS Morningstar will monitor Midland’s ability to maintain reasonable workload levels, contain turnover, and achieve another cycle of satisfactory audits. DBRS Morningstar also will continue to monitor the Company’s performance with its changed, albeit well-tenured, leadership team, expanded use of vendors, enhanced technology, and ongoing staff training efforts to execute its duties with accuracy and timeliness across all functions.

As of June 30, 2021, Midland’s total servicing portfolio, including shared-servicing arrangements, consisted of 28,812 loans with an aggregate unpaid principal balance (UPB) of $577.90 billion. It was a CMBS primary and/or master servicer on 529 transactions containing 8,184 loans with an aggregate UPB of $165.14 billion. The Company was the master and primary servicer for 1,206 single-family rental (SFR) loans (220,001 properties) with an aggregate UPB of $28.91 billion, which included 57 securitizations with a UPB of $26.60 billion and 1,140 loans. Midland serviced nine collateralized loan obligation (CLO) transactions containing 201 loans with an aggregate $4.78 billion UPB as well.

As of June 30, 2021, Midland was the named special servicer on 488 transactions, including CMBS, Freddie Mac, SFR, one CLO, one collateralized debt obligation, and some asset-backed transactions that collectively contained 8,670 loans with a UPB of $219.05 billion. Midland’s assignments as a named SFR special servicer included 52 securitizations containing 761 loans with an aggregate UPB of $25.87 billion.

At mid-year, the active special servicing portfolio contained 392 assets (385 in CMBS or other securitization types) consisting of 384 loans (nine non-real estate) and eight real estate-owned (REO) assets with a combined UPB of $8.97 billion. SFR loans were nearly 8% of the active loan portfolio by count. By comparison, as of year-end 2019, the active portfolio had 132 assets (including eight REO assets) with a combined $2.06 billion UPB.

All rankings are subject to surveillance, which could result in rankings being raised, lowered, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar North American commercial mortgage servicer rankings are not credit ratings. Instead, they are designed to evaluate the quality of the parties that service commercial mortgage loans. Although the servicer’s financial condition contributes to the applicable ranking, its relative importance is such that a servicer’s ranking should never be considered as a proxy of its creditworthiness.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American Commercial Mortgage Servicer Rankings (October 20, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

For more information on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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