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Improving Your Customer Experience with Capital Markets Execution Supplemental Mortgages

March 18, 2013

One of the strengths of our Capital Markets ExecutionSM (CME) program in helping to meet a broad range of borrower financing needs is our ability to offer Supplemental Mortgages behind securitized loans. As our CME program matures, we’ve gained experience and understanding of borrower needs in the origination process for CME Supplemental Mortgages. In light of that experience, we’re implementing process changes to improve and enhance the CME Supplemental Mortgage execution. We’re introducing these changes as one component of our broader approach to defining and implementing Servicing Standards for our CME Mortgages before and after securitization.

The following program enhancements are designed to reduce redundancies and provide consistency across Master Servicers, resulting in better customer service to the borrower throughout the life of the loan.

  • Guidance Document – We are providing Seller’s legal counsel with a set of documentation and process tips for closing CME Supplemental Mortgages.
  • Intercreditor Agreement (ICA) – Sellers and their legal counsel can now directly access a Word version of the ICA from our Document Management System (DMS), which will speed the process of preparing this document and having it executed by the Master Servicer in advance of closing.
  • Commitment Letter – We have revised the CME Supplemental Mortgage provisions in our commitment letter to provide improved clarity during the origination process and to flag key issues such as the automatic trigger in the senior loan documents for senior lender to collect deferred escrows when a CME Supplemental Mortgage is originated.
  • Pooling and Service Agreement (PSA) – This document has been revised to provide improved guidance to Master Servicers regarding CME Supplemental Mortgages, including calling out the fact that Master Servicers do not have approval discretion for CME Supplemental Mortgages.
  • Consent Request Tracker (CRT) Tool – Primary Servicers will be responsible for logging borrower consent requests for CME Supplemental Mortgages in CRT before the end of the year.

Clarifying CME Supplemental Mortgages

The streamlining of our CME Supplemental Mortgage process does not impact our borrower requirements. In fact, we are the only CMBS provider that offers an additional financing option for seasoned securitized mortgages. With continued improvements to the rental market, many borrowers with seasoned CME Mortgages are requesting CME Supplemental Mortgages.

It’s important to remember that there must be a material increase in the net operating income of a property to qualify for a CME Supplemental Mortgage. The following are key items a Seller should consider when discussing a CME Supplemental Mortgage with a borrower:

  • Only the Seller that originated the first CME Mortgage is eligible to originate the CME Supplemental Mortgage.
  • The first CME Mortgage must be seasoned for a minimum of 12 months.
  • The first CME Mortgage must have a remaining term of three years or more.
  • The CME Supplemental Mortgage must be a minimum of $1 million.
  • The CME Supplemental Mortgage will be structured as a yield maintenance loan and must have a maturity date that matches or extends beyond the maturity date of the first CME Mortgage.
  • The LTV and DCR thresholds set out in the first CME Mortgage loan documents must be satisfied when all outstanding mortgages and the proposed CME Supplemental Mortgage are combined, but consult the Supplemental Mortgage Term Sheet for more detailed information.

Seller/Servicer Process Changes

It’s crucial that Seller/Servicers identify all the parties for both the CME Mortgage and the CME Supplemental Mortgage as early as possible. Sellers must obtain the contact information for the signatory of the ICA from the Master Servicer early in the process and begin coordinating execution of the ICA.

To assist you with the ICA execution timeline and avoid possible closing delays, we are giving you access to the agreements in DMS. Each K-Deal has a different form ICA, so you should download the ICA for completion on a deal-by-deal basis.

We have clarified that Master Servicers have a limited role in the CME Supplemental Mortgage process. While they are a signatory of the ICA, the Master Servicer does not have any consent rights for the CME Supplemental Mortgage. The Master Servicer or the Primary Servicer, which in most cases is also the Seller of the CME Supplemental Mortgage, does have a role in collecting the subordinate financing underwriting items and delivering them to either you, when you are not also the Primary Servicer of the CME Mortgage, or Freddie Mac.

If you are both the Seller of the CME Supplemental Mortgage and the Primary Servicer of the CME Mortgage, you are the single collection point for underwriting items, which you will deliver to Freddie Mac. Sellers are required to confirm that the financing of the CME Supplemental Mortgage meets the requirements under the first CME Mortgage loan documents and to coordinate execution of the ICA with the Master Servicer.

Defining Servicing Standards

Our overall goal in leading these program changes is to enable concurrent processing of all borrower requests among the Primary, Master and Special Servicers for any CME Mortgage. We expect that our approach will help to define the industry standard for managing the supplemental mortgage process. We’re working to ensure that our CME program and Servicing Standards are the same regardless of the mortgage type. We want our Servicing Standards providing a comparable experience to a portfolio mortgage. As always, we want to ensure a uniform Servicing Standard that meets the needs of borrowers throughout the life of their loan.

Please contact Christine Halberstadt at (703) 714-2794 with any questions about CME Supplemental Mortgages.

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