DBRS Morningstar Confirms Midland Loan Services’ Commercial Mortgage Servicer Rankings; Trend for Primary Servicer Ranking Remains Positive

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). The trend for the primary servicer ranking remains Positive and the trends for the master and special servicer rankings remain Stable.

Midland, as one of the largest-volume commercial mortgage servicers, manages a diverse and complex portfolio. The Company displays solid management and professional depth, thorough asset administration, a comprehensive audit regimen, and effective technology.

After leadership changes and some functional realignments in 2021, Midland earlier this year more broadly reorganized its operating structure, which entailed additional functional realignments and reporting line changes. Most of the reorganizing involved internal promotions and redeployments of well-tenured managers. Concurrently, Midland, which is based in Overland Park, Kansas, opened offices in Dallas and Birmingham, Alabama. The Company expects its retooled structure and new servicing locations to increase productivity, facilitate managerial oversight, promote career development, and expand its hiring reach. To support portfolio management tasks, Midland also uses several vendors including a core vendor with offshore staff.

Reflecting the tight labor market conditions, Midland, as with many other servicers, has been challenged with increased employee turnover over the past 18 months. However, workload ratios for primary/master servicing have continued to decrease to within industry norms, which Midland largely accomplished through new and proactive hiring mandates and staff redeployments after some servicing assignments concluded.

In collaboration with PNC Bank’s resources, Midland continues to roll out significant technology enhancements collectively aimed to boost workflow efficiency. The Company has sound data backup and data protection practices. Midland also continues to progress in moving the Enterprise!℠ Loan Management System, which it licenses to other servicers through hosting arrangements, to a cloud-based computing environment.

Internal audits completed since mid-2020 have been overall satisfactory albeit with a few cited exceptions, including a 2021 Service Organization Controls report that rendered a qualified opinion. Midland has fully resolved nearly all of the controllable audit issues, some of which were self-identified.

As a master servicer, Midland has sound practices for advancing and determining recoverability and is proficient with the reporting requirements for commercial mortgage-backed securities (CMBS). The Company continues to incur an elevated number of reporting and remittance errors, although it promptly corrects them and implements retraining and procedural adjustments in response. Effective subservicer oversight practices include the resumption of on-site audits, which Midland had conducted only as desktop reviews, and without virtual meetings, during the pandemic.

As a special servicer, Midland should remain highly capable for CMBS and other third-party assignments based on its well-experienced leadership and asset managers, diligent procedures, and technology capabilities. The Company demonstrates successful asset resolution results while maintaining reasonable workload ratios for its still high asset volume.

The Positive trend for the primary servicer ranking recognizes Midland’s completed and ongoing technology advancements, lower workload ratios, and overall improved audit results. The recently reworked organizational structure and related managerial changes, as they further gel, should bode well for the Company to realize increased operating synergies and efficiencies. DBRS Morningstar further acknowledges the Company’s efforts to refortify and expand its workforce while contending with higher employee turnover. DBRS Morningstar will monitor Midland’s performance as a master servicer over the next year to demonstrate fewer issues with investor reporting/remitting accuracy and timeliness.

As of June 30, 2022, Midland’s total servicing portfolio, including shared-servicing arrangements, consisted of 25,353 loans with an aggregate unpaid principal balance (UPB) of $627.65 billion. It was a CMBS primary and/or master servicer on 560 transactions containing 8,628 loans with an aggregate UPB of $178.86 billion. The Company’s master and primary servicing included 1,174 single-family rental (SFR) loans (242,980 properties) with an aggregate UPB of $43.73 billion, which included 75 securitizations with 1,131 loans having an aggregate UPB of $41.55 billion. Midland also serviced nine collateralized loan obligation (CLO) transactions and one collateralized debt obligation (CDO) collectively containing 201 loans with an aggregate $6.29 billion UPB.

As of June 30, 2022, Midland was a named special servicer on 517 transactions that collectively contained 7,561 loans with a UPB of approximately $230.24 billion and included CMBS, Freddie Mac, SFR, three CLO, one CDO, and some asset-backed transactions. It also serves as the special servicer for some balance sheet lenders. Midland’s assignments as a named special servicer for SFR loans covered 72 securitizations containing 856 loans with an aggregate UPB of $42.92 billion.

As of June 30, 2022, Midland had 190 specially serviced assets (187 in securitizations) consisting of 182 loans (five not backed by real estate) and eight real estate owned assets with a combined UPB of $4.56 billion. SFR loans accounted for approximately 9% of the active loan portfolio by count.

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 (September 8, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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

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