“Surviving Special Servicing: What to Expect If Your Loan is Referred”

Posted on May 9, 2023 by Scott MacPherson

Prior to joining Patel Law Group, I worked for two large servicers of Fannie Mae and Freddie Mac loans, and eventually ended up working in one of their special servicing departments managing underperforming loans. It wasn’t fun, and borrowers were annoyed, but it gave me a great understanding of what borrowers deal with once a loan has closed and moved into servicing.

Due to current market conditions and after the effects of COVID, some properties are not performing as well as everyone had hoped at underwriting. If your lender receives property financials showing a DSCR below the agreed upon ratio; there are repeated missed monthly loan payments; reports of the property being in continuous disrepair or legal trouble; or any other form of default is observed, your loan will likely be sent to “special servicing”. Special servicers may be a third-party servicer external to your loan servicer, or they may simply be another department within the loan’s current servicing company, often called “loan surveillance”.

Surveillance is exactly what the servicer is going to be undertaking in regard to your loan and the property — keeping a close eye on the property’s performance and condition, and engaging with the borrower regularly for updates and information. Being referred to special servicing isn’t insurmountable, and plenty of loans are later referred back to the servicer once performance improves.

While in special servicing, the asset manager now assigned to your loan, will begin requesting more information to explain why your property is underperforming, including frequent requests for rent rolls, marketing plans, and financials among other items. The asset manager will likely also begin doing Google searches regularly to make sure there aren’t any articles, legal cases, or other issues associated with the property that would account for the property’s troubles. You can also expect inspections to be ordered, whether they’re just drive-by inspections reviewing the exteriors and conditions of the property or more thorough inspections entering units and systems.

If your loan is securitized by Fannie Mae or Freddie Mac, the asset manager is also obligated to report the issue to them. Fannie and Freddie will likely request an explanation of the troubles at the property, and an approved action plan the asset manager will create with Fannie or Freddie’s guidance, and working with you, with the hopes that the plan will allow the property to improve its performance. Fannie and Freddie will continue to monitor the property’s progress.

In the event you have repeated issues with one or multiple properties serving as collateral for Fannie loans, a major concern is that you may be added to the ACheck list. ACheck is a database that allows Fannie Mae to review its past experiences with a borrower and key principals, and can affect the borrower and key principals’ ability to obtain a loan in the future. Also note, that each time you apply for a new loan with a Freddie or Fannie servicer, all asset managers working with you and your properties are surveyed for current issues/concerns. So it is best to cooperate with both your asset manager to ensure you aren’t blacklisted from future loans, or subject to less favorable loan terms like increased reserves.

If the issues at the property cannot be resolved, and the loan goes into default, loan modifications and debt workouts may be required or worst-case scenario, a foreclosure leaving the borrower responsible for any shortfalls between the sale price and the amounts owed to the lender.

Facing challenges with your loan? Think you may end up being referred to special servicing, feel free to reach out to discuss the process and what to expect.  This article is in no way a full coverage of the issues you may face.