Servicer Evaluation: Midland Loan Services

Transcription

1 Servicer Evaluation: Midland Loan Services Primary Credit Analyst: Mark I Goldberg, New York (1) ; mark_goldberg@standardandpoors.com Secondary Contact: Timothy E Steward, New York (1) ; timothy_steward@standardandpoors.com Table Of Contents Major Ranking Factors Opinion Key Changes Since Last Review Outlook Profile Management And Organization Internal Controls Loan Administration: Primary Servicing Loan Administration: Master Servicing Loan Administration: Special Servicing REO Management And Disposition Legal Department NOVEMBER 20,

2 Table Of Contents (cont.) Financial Position Related Criteria And Research NOVEMBER 20,

3 Ranking Overview - Midland Loan Services Commercial Mortgage Servicer Overall ranking Management & Organization Loan/Asset Administration Outlook Primary Strong Strong Strong Stable Master Strong Strong Strong Stable Special Strong Strong Strong Stable Major Ranking Factors Strengths: Solid breadth and depth of manager and staff experience; Strong technology platform; Comprehensive quality control and audit environment. Weakness: Increasing inventory time of REO properties; Borrower consent response times for certain transactions, mitigated by detailed tracking. Opinion Standard & Poor's Ratings Services affirmed its STRONG commercial mortgage primary, master, and special servicer rankings for Midland Loan Services (Midland), a division of PNC Bank, N.A., a wholly owned subsidiary of The PNC Financial Services Group, Inc. The outlook is stable for all three rankings. The financial position is Sufficient. The affirmed rankings reflect our opinion of the company's very experienced management and staff, well written manuals, internal controls, audit regimes, and comprehensive and integrated servicing technology. Our rankings are based on the strong internal operational controls and integrated technologies Midland benefits from, as well as the company's very stable staff and consistently low turnover rates. Key Changes Since Last Review Midland has increased primary servicing and decreased special servicing staff levels in line with volume changes. The servicer has enhanced its servicing platform to improve its asset management special servicing module. Midland increased fee-for-service and Real Estate Solutions asset management business line activities for third parties and governmental clients. Outlook The outlook for each ranking is stable. Given the company's track record of managing complex servicing structures, a sound technology environment, servicing efficiencies, and ongoing procedural diligence, we expect the company to remain a highly effective and proactive servicer for all of the portfolios it services. NOVEMBER 20,

4 Table 1 Key Servicing Statistics Servicing Portfolio Special Servicing UPB in mil. $ No. of loans UPB year-over-year % change No. full-time employees UPB mil. $ No. of assets UPB year-over-year % change No. asset managers June ,977 31, , (32) 35 December 2011 December 2010 December 2009 December 2008 UPB--Unpaid principal balance. 255,129 26, , (34) ,917 26,993 (3) 363 6, (43) ,996 25, , ,079 24, , Profile Table 2 Servicer Profile Parent company The PNC Financial Services Group, Inc. Servicing affiliates None Main location Overland Park, Kan. Servicing system Enterprise! Financial Position Sufficient Midland Loan Services is a division of PNC Bank, N.A., which is a wholly owned subsidiary of The PNC Financial Services Group, Inc. Servicing activities are headquartered in Overland Park, Kan. Midland has a 20-year history in commercial mortgage servicing and special servicing. PNC Financial Services Group is also a shareholder in BlackRock Inc., which has a subsidiary that has been a major B-piece investor (for itself and/or its clients) in CMBS securitizations. Management And Organization The subranking for management and organization is STRONG. Staffing depth and organizational effectiveness Table 3 Industry Experience/Company Tenure As of June 2012 Senior Managers Middle Managers Staff Experience Tenure Experience Tenure Experience Tenure Primary Special NOVEMBER 20,

5 Tenure and experience levels are commensurate with Standard & Poor's other highly ranked servicers, and turnover during the first half of 2012 was under 5%, which is also consistent with our highest ranked servicers. In terms of efficiencies, loans-per-employee (LPE) for primary/master servicing is approximately 75 to 1 and loans/reo for special servicing (assets per asset manager) is approximately 10 to 1 (table 4). Table 4 Servicing Portfolio Primary/Master Special Servicing Average loan size $) Loans per employee* Avg. asset size $) Assets per asset manager June December December December December *Based on U.S. volume. NOVEMBER 20,

6 As of June 2012, Midland's servicing organization encompassed approximately 474 employees, with 416 devoted to primary/master servicing and 58 positions in special serving of which 35 were asset managers. As part of the PNC Financial Services Group, Midland leverages selected activities (HR, corporate legal, and finance) from its parent through dotted line reporting relationships. Total staffing at midyear 2012 increased from prior years commensurate with portfolio growth in number of loans. Although CMBS servicing continues to represent a large portion of Midland's business, CMBS runoff was offset by agency and other third-party investors and fee-for-service relationships. In our opinion, Midland's organizational structure fully covers all servicing activities with logical and effective reporting lines and appropriate segregation of duties and uses both a portfolio and transactionally aligned operating structure in handling all servicing operations. Training The training programs, which are guided and administered by a senior management committee within the servicing departments, arrange the company's formal professional development curriculum and schedule in conjunction with department managers. Midland's overall employee training is on par with other highly ranked servicing organizations. Employee training goals are 30 hours per year for managers and 20 hours per year for staff. Company intranet is used to provide courses and schedules and to track completion hours. The Midland Employee Enrichment Training program is diverse, well focused, and incorporates internal and external programs such as various Mortgage Banker Association courses. Senior managers and external subject matter experts provide many of the course offerings, and the programs address job-specific needs across most positions and departments. In our opinion Midland offers an extensive training curriculum and leverages PNC's HR to assist with these efforts. The annual training hour goals are a bit below the target reported by many of our other ranked servicers, although offsetting this, in our opinion, are the experience and tenure within the organization. The formalized use of a within function/business line senior manager committee to evaluate, outline, review results and as necessary modify curriculum annually is a positive aspect of the overall program. We believe this to be an acceptable alternative to having a full-time dedicated training administrator within Midland's servicing department. Technology Midland's technology platform centers on a data management system that promotes automation and efficiency, and is scalable to accommodate an increase in servicing volume. Enterprise! is the loan servicing/asset management system, and provides centralized loan administration, portfolio and loan-level data management, and investor reporting functionality for a multiple of formats including government-sponsored enterprise (GSE), life companies, and CMBS Investor Reporting Package requirements. The Asset Management module provides special servicing administration and reporting, and is integrated with Enterprise!. The servicing system is integrated with general ledger, corporate Treasury functions, and an internally developed bank account reconciliation program; all of which facilitate accounting, loan boarding, and advancing functions. A borrower and investor Web site is supported, and the investor Web site provides portfolio, asset, and property level information to assess pool and loan performance. A separate module provides automated data downloads from subservicers as well as oversight of administrated tasks. NOVEMBER 20,

7 Overall, we believe Midland's data management and reporting tasks are highly automated, as evidenced by the company's high LPE ratio. The company made additional enhancements during 2011 and 2012 that improved on automatic notifications on events, downloading capabilities, linking features to external data and Internet sources, rent roll extract to Excel, and customized Web-based portfolio views for retrieval. Disaster recovery In our opinion, Midland's disaster recovery and business continuity plans include well-detailed and daily data back-up routines, off-site data storage and retrieval, and fail-over mechanisms. The plans address all core systems and operational areas and are tested at least annually. The last test was successfully conducted in April In addition, the plans call for: All critical servicing processes to be restored within one day or less. A redundant servicing site and a third-party hot site. Overall, we believe that Midland's daily data backup and storage procedures are sound. The recovery strategy features the use of contingency (hot site) and alternate work sites. Midland uses its parent's Pittsburgh, Pa. based data center for its hot site data center, and an additional software development office for Enterprise! in Little Rock, Ark., which serves as an alternate work site. Also, as a major application system provider to the commercial mortgage industry for the Enterprise! application, the overall corporate organization ensures data backup and redundancy for all its clients. Internal Controls Corporate governance Midland does not have any real estate-related affiliated companies or subsidiaries such as property management and/or brokerage activities. As such, defined procedures for handling conflicts of interests over such vendor selections are not required; however, there are good internal controls for monitoring such third-party vendors. Audits The organization is subject to internal as well as a number of external audits, and also benefits from an independent Quality Control department. These multiple levels of review support strong and responsive risk avoidance and correction procedures. Quality Control reports independently from servicing operations and monitors the compliance with internal controls, regulatory and contractual requirements, conducts quality control compliance reviews, and serves as a liaison with external auditors. Midland's quality control efforts also include a quarterly management certification process for departmental controls, with the workflow management system used to monitor accuracy and timeliness across functional areas. In addition, the company is in compliance with USAP and RegAB (platform wide) certifications and a SSAE 16 review for The bank's internal audit department also conducts annual operational reviews; the last review in April 2012 indicated a few minor issues that were quickly addressed. NOVEMBER 20,

8 Policies and procedures Midland's policies and procedures are comprehensive, easily navigable, and cover all aspects of servicing activities. Each function provides descriptive narrative as well as directions, system screen displays, and step-by-step instructions. The company's policies and procedures are also: Accessible to all employees via a shared network drive. Written employing a standardized electronic format template. Updated by a manager in the loan servicing group who incorporates all necessary changes from the business units, compliance, and legal groups. Reviewed by senior managers for authorization of changes. Updated and electronically communicated via the company intranet for consistent dissemination. Vendor management The company employs a number of outside firms for various servicing and special servicing activities such as taxes, UCCs, inspections, appraisals, environmental review, property management, brokerage and legal services. Midland maintains approved vendor lists for those asset-specific services. Vendor contracting is handled by senior management for platformwide functions (tax, UCCs), recommended by assigned asset managers, and approved by department heads for special servicing activities. System applications provide approved vendor lists, which include performance ratings. We believe Midland's third-party vendor processes are well monitored and enable the company to have appropriate controls over the vendor selection process. Corporate insurance and litigation Midland has appropriate corporate insurance (directors and officers and errors and omissions) coverage, and there are no material corporate litigation matters other than servicing-related matters in the ordinary course of business. Loan Administration: Primary Servicing Table 5 Primary Servicing Portfolio UPB loans No. 30 days 60 days 90+ days Total delinquencies (%) June ,732 30, December ,453 25, December ,138 26, December ,901 24, December ,885 23, UPB--Unpaid principal balance. The subranking for primary loan administration is STRONG. The affirmed ranking is particularly based on our continued assessment of the company's staff and active portfolio management processes, lower delinquency rate compared with the industry average, and asset management abilities associated with Midland's sizable portfolio of cash-managed loans. As of June 2012, Midland's primary servicing portfolio declined slightly by unpaid principal balance (UPB) but NOVEMBER 20,

9 increased based on number of loans. The majority of the portfolio is still CMBS (45%; see table 8), while the remaining portion (55%) is broadly distributed across other investors including a number of fee-for-service relationships under which not all primary servicing activities are performed. In our opinion, this in part is reflective of the company's high LPE ratio compared with that of other ranked servicers and the high LPE is also reflective of the highly efficient automation contained across Midland's servicing platform. The servicing group (chart 1) consists of numerous departments making up the three major groups shown, covering approximately 350 employees for direct primary servicing organized along both transactional and functional activities such as payment processing, tax/insurance, covenant administration, and asset/portfolio management by investor group to name a few. The high degree of automation is evident in: Payment processing and bank account reconciliation. Handling of complex cash management agreements. Automated triggers and alerts on loan covenants events. New loan setup Midland effectively administers the loan setup process and guards against data input errors. The majority of new loan setup is accomplished via electronic file downloads, and document imaging procedures and error checking features within the servicing system facilitate the data validation process. Borrower welcome letters are issued within five business days of loan activation. Abstracts of key servicing requirements and trigger events are integrated into ticklers throughout the Enterprise! platform. Data integrity controls include a secondary review by a senior file review specialist to verify documentation against the servicing system. Formal tracking and pursuit of missing documents, resulting in 0% trailing documents. The setup area is also used to re-board loan modifications and document tracking for loans returned from special servicers. The company noted that it tracks boarding timeliness metrics and confirms accuracy through its quality control process. Midland also has a separate CMBS servicing group that oversees the negotiation and administration of pooling and servicing agreement (PSA) requirements and is an integral part of setup activities. Online PSA abstracts assist in identifying compliance covenants and reporting/distribution dates. The group also assists in tracking returned special servicing loans and also provides a sound control point for verification of data on re-boarded loans. Payment processing Midland has a well-established track record processing complex payment structures in a highly automated manner. Midland's transaction processing unit oversees loan payment processing in conjunction with the Treasury group. Electronic payment capture rate is 99%, of which 80% is received through the usual sources (automated clearing house 34%, wires 13%, and lockbox 32%) and 19% are received through loan-specific (hard) lockbox collections. Loan-specific hard lockbox collections are electronically posted to the servicing system through integrated banking NOVEMBER 20,

10 and imaging software. The 2% of payments received as live checks at the servicer's street address are handled through what we consider to be acceptable control procedures such as logging and tracking of bank batch deposits. Over 1,300 accounts are cash-managed (hard lockbox) loans and are handled through efficient automation routines. Duties for the receipt and deposit of funds, batch processing, and payment posting are appropriately segregated. Online bank account access is used to balance the daily payment clearing account and perform a complete daily reconciliation including aging of open items. The company effectively monitors loan covenants for activation of springing lockboxes, and has established processes from its loan/portfolio surveillance activities into its loan boarding/modification and payment processing to accomplish changes as needed. Escrow administration Midland has dedicated teams for tax and insurance administration, and asset managers handle loan-level reserve monitoring and analysis for other escrowed events such as tenant improvement and replacement reserves. In our opinion, the company has sound controls for all escrow administration activities. The system tracks taxes and insurance. Loans escrowed for taxes and insurance were 52% and 35%, respectively. A tax service is used for both escrowed and non-escrowed loans, and insurance policies are reviewed for compliance internally. Renewal notices are automatically system generated for insurance policies and letters are sent on non-escrowed tax accounts. A forced-placed policy is in effect with a suitable carrier rating, which provides for an extensive look-back period, and the company had a very small number of loans on forced-placed coverage. Insurance notices and new loan welcome letters are automatically generated through the servicing system. Reminder notices for evidence of non-escrowed tax payments are not automatically produced, which is acceptable because the company tracks taxes on non-escrowed positions through the tax service vendor. Insurance renewal notices are generated at 30 days priors rather than the more customary 60-, 45-, and 30-day campaign practiced by many other servicers. Overall, we believe that Midland is well experienced and efficient in handling tax, insurance, and other escrow reserves. Asset and portfolio administration Midland has an experienced staff and diligent procedures covering asset and portfolio administration tasks including loan performance monitoring, covenant tracking, and collateral review. Portfolio management includes dedicated staff responsible for loan watchlist and performing loan asset management, reserve account, and covenant administration. The portfolio management staff consists of credit analysts aligned with asset managers. Policies and procedures are well designed including processes for monitoring complex loan and structures. Staff that have expertise for credit and collateral performance monitoring A detailed and centrally controlled watchlist process with automated triggers. Individual loan level credit risk ratings are assigned. Asset managers review principal and interest (P&I) and property protection advances (PPA) advancing needs, watchlists, and monitor specially serviced loans. Proactive procedures to obtain and review annual property inspections and financial statements. NOVEMBER 20,

11 Tracking of property statements and inspections is automated through the servicing system. A third-party vendor enters financial statement data and in-house credit analysts perform an initial compliance review for imaging and analysis of the data. Midland maintains dedicated staff for the above activities and has separate staff assigned for loan/deal documents, monitoring UCCs, rate changes, and lien releases. The company also has good controls over ensuring that financial statements and inspections are in compliance with the company's policies, servicing agreements, and loan documents. In our opinion, and consistent with our ranking requirements, the company handles loan and portfolio administration activities in a well-controlled and thorough manner. Investor reporting Midland has dedicated staff for the various investor activities that are properly segregated for reporting, remitting, and related account reconciliation processes including sound internal controls. The servicing system interfaced with the general ledger to facilitate ledger entries and reconciliation of balances. Outgoing wires processed under dual controls. Automated nightly funds transfers from payment clearing to custodial accounts by the servicing system. Automatic generation of investor reports from its servicing system. Overall, Midland has had consistent performance in providing timely and accurate investor reports and remittances. The company also has a high level of asset-specific knowledge and responsiveness in handling investor and other inquiries including highly structured credits. Borrower requests NOVEMBER 20,

12 Chart 2 Midland's average times for handling borrower requests during the first half of 2012 were higher on an overall basis for assumptions and property releases. The exceptional times for assumptions and partial property releases were requests associated with larger, more complex structured loans, multiple properties, other external approvals such as air rights, and/or other legal delays in closings after approval. In many cases the extended times were caused by borrower delays in providing sufficient documentation. Looking at the data devoid of excessive borrower delays (Chart 3) results in a better than industry average for all consents, and notable better internal times. NOVEMBER 20,

13 Chart 3 Requests are tracked via the servicing system and a third-party vendor is periodically used to process/underwrite the request for Midland's review and approval. Midland facilitates borrower communications through its borrower Web site, and requests are tracked on the servicing system with notations as to issues/delays in completing requests. Approvals are based on delegations of authority and larger credit matters are controlled through a committee process and may involve review by the special servicing area for approvals. Notwithstanding the longer overall times for certain consent types, it is our opinion that Midland has a very well-controlled, tracked, and responsive operation in handling borrower requests. Early-stage collections NOVEMBER 20,

14 Chart 4 Midland's asset management section has dedicated staff to handle early stage collections. The servicing system provides an automated collection queue and progress tracking management. All collection letters are system-generated. Reminder letters are automatically issued within one day of the payment due date or expiration of the grace period. Borrower telephone contact is initiated within two days of the due date or when the grace period expires. Midland's overall total delinquencies for its entire servicing portfolio (primary and master servicing at 9.5%) are on par with industry averages (Trepp at 9.5% versus Standard & Poor's rated deals at 9.6%), although its CMBS servicing rate (at 11.4%) was much higher than industry averages. In our opinion, the higher CMBS delinquency rate is related to the increase in the company's special servicing assignments as well as transfers from other servicers/special servicers. The company has also been handling a number of small-balance distressed debt portfolios, which have elevated the delinquency ratio. Loan Administration: Master Servicing NOVEMBER 20,

15 Table 6 Serviced By Others UPB $) No. of loans No. of subs 30 days (%) 60 days (%) 90+ days (%) Total delinquencies (%) June , December , December , December , December ,194 1, Table 7 Portfolio Breakdown By Property And State Type UPB June 30, 2012 June 30, 2012 No. of loans % UPB % of no. loans State UPB No. of properties % UPB % of no. properties Office 44,184 2, CA 71,352 8, Multifamily 86,087 11, NY 19,635 1, Retail 46,171 4, TX 19,013 3, Lodging 12, FL 15,909 4, Industrial & warehouse 10,164 1, IL 8,614 1, All other 54,859 9, All other 119,454 27, Total 253,977 31, Total 253,977 47, UPB--Unpaid principal balance. Table 8 Portfolio By Investor UPB $) No. of loans % UPB CMBS 116,010 10, GSEs 68,023 7, Banks/Fin. institutions 9,096 6,830 4 Life cos. 36,184 1, CRE-CDOs 2, All others 22,647 4,514 9 Total 253,977 31, The subranking for master servicing loan administration is STRONG. The ranking reflects the company's oversight and integrated reporting of subservicers, Midland's conservative advancing policies and track record in advancing decisions involving many large-scale and complex assets, and a diversified investor base. CMBS continues to represent a majority of Midland's investors. The $254 billion of master servicing as of June 2012 consists of $243 billion of primary serviced loans plus $11 billion from 27 subservicers. As of June 2012, the company was master servicer for 187 transactions with an outstanding total of $100.8 billion for 8,600 loans, and a subservicer on other CMBS transactions for the total of $15.2 billion in its total CMBS servicing portfolio of $116 billion (table 8). NOVEMBER 20,

16 Subservicer oversight is handled jointly by Quality Control and the Investor Reporting section within servicing operations. Investor Reporting handles day-to-day transactional activities, while Quality Control oversees subservicers compliance requirements and audits. As a master servicer, borrower requests are channeled through servicing within the operations group's borrower services and/or the RES servicing operations depending on the source and nature of the request. New loan setup The company follows the same protocols for new loan setup of subserviced loans with regard to loan setup on the servicing system. Because these loans are all serviced by other servicers, the setup process is essentially via electronic file downloads. After file download, the loan records are checked by loan administration using the same standard of internal controls that is used for primary serviced loans. Imaged documents are received from subservicers and incorporated with the loan record through the imaging system. Online investor deal summaries/psas assist in monitoring subservicer and primary serviced activities to ensure that the reporting procedures are handled correctly. Loans are set up for "shadow servicing" to record loan-level P&I payment records, and tax and insurance information is not loaded at the loan level but monitored via quarterly officer certificates and monthly subservicer reports. Payment processing Midland has appropriate controls for recording subservicer remittances. Midland is well experienced in overseeing a large number of subservicers (table 6). Aspects of subservicer remittance accounting include: Midland's subservicer oversight staff provides subservicers with monthly calendars that note all critical reporting and remittance deadlines. Accounting staff in Investor Reporting reconcile incoming subservicer remittances to the servicing system and perform bank account reconciliations. Escrow administration Midland takes proactive measures to monitor subservicer activity relating to the tracking of real estate taxes, insurance, UCC filings, and reserve account receipts and disbursements. Monthly subservicer electronic downloads update expiration and paid-to dates on Midland's system, and the company uses exception reports to resolve open items with subservicers. Subservicers are required to provide quarterly officer certifications in compliance with subservicing agreements. Subservicer on-site audits and desk reviews are used to confirm accuracy of the data and quarterly certifications. Subservicer oversight (Asset/Portfolio administration and compliance) Midland's surveillance operations include reviewing subservicer property inspections, re-analyzing property financial statements, and monitoring watchlist triggers for subserviced loans. When reviewing property financial statements submitted by subservicers, Midland compares the subservicer's debt service and cash flow calculations with the borrower's actual property operating statements. Computation errors, deferred maintenance issues, cash flow questions, and follow-up calls are placed to the subservicer. NOVEMBER 20,

17 Masterserviced loans are placed on the watchlist following the same criteria used for primaryserviced loans. Performance issues on subserviced loans, which are discussed during watchlist committees. Several Midland departments review subservicers' monthly collection activities and the status of workout activities from special servicers Subservicer audits are accomplished by either on-site or desk reviews, which are annual in cases where the subservicer is associated with any of the top 10 loans in a CMBS transaction. A detailed audit template is used for reviewing subservicer performance for all core functional areas. Before initiating an audit, the Quality Control & Regulatory Compliance group manager completes a quality control checklist and the subservicer completes a subservicer compliance questionnaire. Overall, we believe that Midland's procedures denote sound practices for subservicer loan and portfolio monitoring, special servicing transfers, and audits. Subservicer audit results are used to assign both an acceptable or unacceptable performance and the subservicer receives a letter containing exception items and recommendations. Master servicer investor reporting The servicing system automatically incorporates subserviced and primary serviced loans for reporting to investors, and all reporting is handled through electronic file delivery and/or investor secured Web site sign and corresponding wire transfers for the remittance. Advancing and recovery are also handled through the servicing system with good oversight procedures, which in our opinion are conservative, for approving advances. Monthly investor reporting and remitting occurs in the Investor Reporting department, which is aligned by investor. The investor's client services analyst reviews the monthly reports (primary plus subserviced loans) for accuracy and other information such as complete watchlist information. A monthly advance review committee provides discussions and approval on continuation of advances and recoverability analysis. Advances are monitored through a series of monthly system-generated advance reports that highlight the advance type (P&I, property protection), valuations, and the ratio of advances to appraised values and unpaid balances. The review also provides for determination of transfers to the special servicer. Waterfalls are monitored regarding advancing, recoverability, and notifications to trustees and Nationally Recognized Statistical Rating Organizations. Midland's advancing policies attempt to avoid interest shortfalls and reduce loss severity. Midland's advance determination criteria involve a four-tiered analysis based on the magnitude of the advance amount, the advance-to-value ratio, and the delinquency of the loan. Notably, the criteria classify advances exceeding 50% of the appraised value as Level III, indicating that they require closer scrutiny to determine whether a declaration of non-recoverability might be required. Midland also has a sound track record of advancing decisions involving large-scale and complex assets. Loan Administration: Special Servicing NOVEMBER 20,

18 Special Servicing Table 9 Active inventory June 30, 2012 UPB December 2011 UPB December 2010 UPB December 2009 UPB December 2008 UPB $) (No.) Average age $) (No.) Average age $) (No.) Average age $) (No.) Average age $) (No.) Average age Loans 3, , , , , REOs Total 3, , , , , UPB--Unpaid principal balance. REO--Real estate owned. The subranking for special servicing loan administration is affirmed at STRONG. Special servicing assignments have been based on relationships with third-party B-piece buyers, and more recently, the company obtained special servicer appointments on behalf of a number of CMBS subordinate tranche (secondary market change in control) and non-cmbs investors. The decrease in total special servicing from 2009 to 2012 is reflected in the resolutions (table 9) and REO liquidations (table 10) and an indication of Midland's ability to resolve problem assets. As of June 2012, Midland was the named special servicer on $74 billion remaining principal balance for 105 CMBS deals and $2.8 billion on eight CRE-CEO transactions. As mentioned earlier in this report, the Special Servicing group encompasses 58 positions of which 35 are asset managers that work on both loans and REO assigned assets. The ratio of assets per asset manager is well in line with that of other highly ranked servicers and in line with our criteria. The company has asset manager offices in Dallas and Atlanta in addition to its Overland Park, Kan. headquarters. Loan recovery and foreclosure management Table 10 Resolution Breakdown Returned to master June 30, 2012 UPB Dec-2011 UPB Dec 2010 UPB Dec 2009 UPB Dec 2008 UPB $) (No.) Average time $) (No.) Average time $) (No.) Average time $) (No.) Average time $) (No.) Average time , Full payoffs DPO and/or note sale Foreclosed loans Total/Average 1, , , UPB--Unpaid principal balance. The affirmed ranking for special servicing recognizes our assessment of Midland: Resolution track record for both loans and REO. Experience in foreclosures including complex and large-scale workouts. NOVEMBER 20,

19 Thorough asset analysis and controlled committee approval process. Efficient technology, standardized template and centralization of all workout plans. The Real Estate Solutions group, which includes the special servicing activities, continues to display an effective and well-disciplined special servicing function. The group consists of three functional departments: A traditional special servicing unit that handles nonperforming loan and REO workouts including asset managers with particular expertise in hotel and healthcare properties. A contract liaison unit that coordinates investor, rating agency, and external (master) servicer communications, vendor management associated with special servicing, and analyzes performing loan borrower requests requiring special servicer consent. A management services unit that oversees surveillance, annual asset reviews, and various third-party due diligence work. Asset managers regularly update business plans/asset status reports for senior management and committee review. Foreclosure and REO disposition recommendations are handled under delegated authority for final approval. During the first half of 2012, average resolution times were generally good, and resolution types (cured and fully payoffs versus DPOs, note sales, and foreclosures) were somewhat evenly distributed by number of cases and UPB. Resolution activity has also been diversified across all property types, states, small and large loans including multi-properties, and investors. Midland proactively handles newly transferred special servicing loans and REO. Asset managers complete file reviews and property inspections, assemble local market data, and develop a loan resolution plan within a 45-day target. The asset management system maintains all workout plans and includes NPV analysis for various scenarios. Asset managers engage vendors, which are tracked within the asset management application, and also provide for time-line monitoring. Plans are presented to a special servicing committee for approval. Workout plans are updated as negotiations dictate. If warranted, plans are updated for a foreclosure recommendation. The company's foreclosure process is soundly controlled and well managed. Recommended foreclosure actions initiate an REO resolution plan, which includes a bidding process for property management and brokers. Detailed pre- and post-foreclosure checklists are used to ensure that all time-sensitive issues surrounding the asset, such as environmental and appraisals, are completed before taking title. REO Management And Disposition NOVEMBER 20,

20 Table 11 REO Sales June 2012 December 2011 December 2010 December 2009 December 2008 Estimated market value UPB $) No. Avg. time UPB $) No. Avg. time UPB $) No. Avg. time UPB $) No. Avg. time UPB $) No. Avg. time Net sales % sale/market value UPB--Unpaid principal balance Midland demonstrates a proactive REO management and sales oversight. Property manager and broker selection is controlled through approved vendor lists. Standard contracts are used, and the engagement of the manager/broker is tracked and administered within the company's servicing systems. Asset managers monitor property managers' adherence to a Midland issued procedure manual for reporting and compliance. Asset managers prepare an REO business plan and budget within 30 to 60 days of acquisition. The approval process is by committee review. All sale bids must be submitted to the appropriate delegated authority, which typically requires a credit committee for final approval. The asset managers, in conjunction with Midland's legal department, coordinate the closing process. Disposition activity over the past several years has been consistent with other highly ranked servicers and reflective of the market cycle and difficulty in valuations. A key attribute, however, in our opinion is the relatively short hold time that Midland successfully achieved combined with the relative sale-to-market value ratios. The REO inventory as of June 2012 was $145 million for 44 properties across all property types and has been in inventory an average of 21 months (table 9). In addition, REO sales for first-half 2012 (table 11) have been for office, multifamily, and retail, and reflected relatively short holding times compared with other ranked servicers. The company uses its Web site to assist in marketing both note and property sale offers in conjunction with its well-controlled broker engagement process. Midland also performs REO periodic revaluations to monitor advances and non-recoverability determinations. REO accounting and reporting In our opinion, Midland has a properly controlled property management accounting function that includes sound monthly bank account reconciliation procedures. Midland's REO accounting and reporting procedures are primarily overseen by the asset managers that monitor monthly property management operating account activity. In addition, the RES Collateral Management group provides a second review of the property management operating account activity. The Quality Control group conducts periodic reviews of the REO property managers throughout the year and focuses on the cash receipt and disbursement processes. NOVEMBER 20,

21 Property managers submit monthly reporting packages to the asset managers, and a large majority are received electronically and uploaded to the company's tracking systems. Property incomes and expenses are controlled through a single trust account that is reconciled monthly. On-site audits of property managers are detailed within the company's procedures, a number of which were conducted during Given the relatively short holding times and average size of the REOs at year-end 2010, Standard & Poor's opinion is that the on-site audit program is effective in ensuring accurate and proper reporting by property managers. Legal Department Servicing and special servicing staffs have access to Midland's eight-person legal staff. The legal staff controls the engagement process and case management oversight involving external law firms. Asset-level legal costs are tracked within the servicing system to facilitate monitoring of special servicing actual legal costs to budgets within asset status plans.. Financial Position The financial position for Midland is deemed to be SUFFICIENT. This assessment is based on the A-/Stable/A-2 credit rating assigned to PNC Financial Services Group, Inc. For further information on this credit rating, please see the analysis published Aug. 29, 2012, on RatingsDirect on the Global Credit Portal. Related Criteria And Research Servicer Evaluation: Midland Loan Services, June 20, 2011 Revised Criteria For Including RMBS, CMBS, And ABS Servicers On Standard & Poor's Select Servicer List, April 16, 2009 Servicer Evaluation Ranking Criteria: U.S., Sept. 21, 2004 Select Servicer List, Oct. 12, NOVEMBER 20,

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