A mortgage pooling and servicing agreement describes how pooled commercial loans will be serviced and dictates how proceeds and losses will be distributed to bondholders.
Commercial Mortgage Backed Securities
To better understand how a mortgage pooling and servicing agreement works, it is necessary to know what commercial mortgage backed securities are. Also known as CMBS, this is a collection of single mortgage loans gathered into one securitized pool. This pool is then transferred as a whole to a trust. The trust then issues a series of bonds -- and these bonds are then sold to investors. It may seem like an excessive amount of handling, but pooling the loans gives investors the opportunity to gain rewards that would not be available if investors put their money into single loans. Of course, along with the opportunity for financial returns, they also take on the risk involved. But investing in pooled loans actually decreases their risk by:
- Creating a diverse range of property types
- Creating a diverse range of property sizes
- Creating a diverse range of property markets
This diversity establishes a greater, more stable pool of mortgage money.
Once a loan has been securitized, the need for a pooling and servicing agreement becomes apparent. With the number of servicers involved in a CMBS (Commercial Mortgage-Backed Securities) responsibilities can easily be lost in the shuffle. The following lists responsibilities of those most often involved once a loan has been securitized:
Primary or Sub-Servicer
This may also be the originator of the loan. This servicer continues contact with the borrower throughout the life of the loan.
May subcontract duties to the Primary or Sub-Servicer but is responsible for their performance. Unless the borrower defaults, the Master Servicer services the loans in the pool through maturity and is regularly expected to process all requests made by the borrower.
In the event of a default or other specified incident, the loan's administration is transferred to the Special Servicer. They also have the authority to oversee actions such as loan assumptions.
Holds loan documents and distributes payments received from the Master Servicer to the bondholders and is often granted a broad authority regarding aspects of the loan under the pooling and servicing agreement. However, it is usual for them to delegate authority to the Special Servicer or the Master Servicer. Because the Trustee holds the loan documents, the Trustee is the one who will be named in actions like lawsuits or non-judicial foreclosures.
When the securitization is closed the Rating Agency rates the pool and monitors its performance. As needed, it updates ratings.
Directing Certificate Holder or B-Piece Buyer
Often, the Directing Certificate Holder holds the authority to give orders to the Special Servicer regarding actions dealing with defaulted loans.
About the Mortgage Pooling and Servicing Agreement
The PSA lists the responsibilities and duties owed to the trust by the Master Servicer. From there, the Master Servicer often generates a sub-servicing agreement with the Primary Servicer to lay out responsibilities and duties expected from them. Many times, this secondary agreement copies provisions laid out in the pooling and servicing agreement. Here are some of the provisions and responsibilities defined in a PSA regarding how the loan is serviced. The PSA:
- Governs the allocation and distribution of loan proceeds and losses to the bondholders.
- Describes how loans are to be serviced including guidelines to make sure the trust complies with the REMIC (Real Estate Mortgage Investment Conduit) provisions of the tax code.
- Standardizes practices and procedures to meet REMIC requirements and to protect the bondholders.
The borrower should be informed regarding the rules that govern the servicing of their loan. If you plan to borrow, you'll want to consider the types of servicing requests you may have in the future so they can be addressed before for the loan closes.