The CMBS Middlewoman: Ann Hambly Talks Borrower Advocacy and Bondholders

“I worked closely with Joe [Dykstra, a co-chief executive officer at Westwood Financial] and his team,” Whittington told Commercial Observer. “It was a wonderful experience, but it took days and nights to get it closed. It wasn’t just one master servicer and one special servicer that we were dealing with: We were working through multiple layers and levels within different servicing shops. So we were working with four different master servicers and five special servicers. Some loans also needed rating agency approval, so we worked through all of that.”

CO sat with Hambly to learn how the firm has successfully negotiated over $15 billion in transactions to date.

Commercial Observer: How did you get into the industry?

Hambly: I grew up in Southern California and got my first job right out of high school. I was coupon-clipping, so billing borrowers for payments in single family [properties]. It was loan servicing, but I didn’t know that’s what it was back then. I’m a hard worker and people recognized that so I kept getting promoted. It just happened as all good careers do, when one day you realize, “I love this, this is what I do well, and I’ve already developed a track record, so I’ll stay in it.”

I’ve actually done almost every single little job in loan servicing—from entry level all the way up—which I think is a huge benefit to me now. I know it all firsthand, and I knew the processes before they was automated. I used to have to calculate things manually, which seems funny today, but this was before there were computers, so you couldn’t just push a button to get an outcome. You had to understand it deeply, and that’s how I learned.

I worked for one company [Cambridge Capital], and that was my best experience ever. I was in my late 20s, and they handed me a portfolio of commercial real estate to service. One borrower wasn’t making payments, and so I went to my boss, and I said, “Now what do I do?” and he said, “Well, go and foreclose.” I didn’t know how to do that, but I had to figure it out. After we foreclosed, I told my boss, “Well, we own the property now, so what do we do?” and he said, “Go ahead and sell it.”

I’ve had a couple of bosses who would throw me in the deep end, which I’m really thankful for now, although at the time it was really nerve-wracking and scary. It’s how you learn the most.

You started 1st Service Solutions in 2005. What gap in the market did you see back then?

I was hired by Prudential (PRU) Asset Solutions in 2000, and they had just acquired Washington Mortgage, which is a Fannie Mae/Freddie Mac servicer-originator. Prudential had two servicing offices and Washington Mortgage had three, so there were five servicing offices in total—all Prudential and all doing the same thing but with five different systems, five different procedures, five different managers. So I was hired to consolidate them.

My boss wanted a certain service level for commercial real estate borrowers. If you come to Prudential for a loan, you don’t really care if Prudential sells that loan to Fannie Mae or onto the CMBS market or keeps it on its books, but you do want good service. But, borrowers would call in with a problem with their property, and if it happened to be in CMBS, we’d have to say, “Sorry, we can’t help.” So their opinion of our service went way down if it was a CMBS loan. So what my boss asked me to do was to make the service level the same for all products so if you got a loan from us at Prudential, no matter what we did with it behind the scenes, you always felt like you had someone at Prudential as your advocate. So I thought, “Okay. I can do that.”

As I dug deeper I found that CMBS is different because there are numerous parties involved in any approvals, and so you can’t make the CMBS loan product the same as a life company loan. As time went on, I had customers call me, and they’d say, “You helped me with my Prudential loan, but I have a loan with, say, Midland Loan Services or Wells Fargo, and so who is like you over at Midland? Because I can’t seem to get anyone to help me.” So I would give them a name because I know people in servicing and they’d call.

After a year or two of realizing how different CMBS product is and that borrowers need help, I thought, Gosh, there is a big need in the market. It was a huge jump. I had a nice big corporate job at Prudential, and I didn’t know if people would pay for this service or not, but I went out and started the firm and stuck my toe in the water.

I spent the first year explaining to borrowers what I could do, although I didn’t have a name for it. I would tell them, “I’m not a broker, I’m not a lawyer, I’m not your servicer.” One day I came up with “borrower advocate,” and it stuck.

Is your business largely based on your history and relationships with the servicing shops?

Absolutely. I’ve been so involved in the commercial servicing industry my entire career, and it’s a small industry.  Even if people move around from shop to shop, it’s the same people. Once you have those relationships, they stick.

In the beginning I would call, and those at the mortgage servicer knew me so they’d take my call. They had their own procedure to work through, but at least the borrower got a voice. After a while 1st Service Solutions as a company became known and the company now has a good reputation and firm standing with the servicers. The reason for this is not because we’re nice or polite, but because we know what the servicer is trying to accomplish and our job is to help them get their job done too. That’s key.

The last thing the CMBS industry needs is to add an extra player who mucks things up or adds complexity. So if we don’t make servicers’ jobs easier or help them accomplish what they need to as a servicer then our business model wouldn’t work.

How has the company grown?

On the first day, it was just me, and I had a desk, a computer and a phone. In the first year, we grew through word-of-mouth: Borrowers were frustrated, were complaining, and someone would say, “Oh, I heard of a firm who can help,” and business multiplied. By the end of the first year, I had five employees, which is still small. I told my first employee, “If you can figure out how to create a paycheck, you can have one.” Now, we have 15 employees.

What’s a typical transaction for you?

Here’s an example of a live transaction, and a classic example of some of the challenges we see. We are working with this client right now on a $95-million mall in the Northeast, and the property value is probably $20 [million] to $25 million. It’s an old fashioned mall that needs complete renovation, and a lot of anchor tenants are missing. The loan is maturing. The borrower got his money out when he refinanced in 2007 (2017 maturity). So again, $95 million loan, $20 million value. The borrower is facing tax consequences based on the difference between the two [$75 million]. So there’s a predicament with no easy solution. What we do is we look at the pool information for the CMBS transaction the loan is in. We try to get an idea about what is going on in the pool, what the special servicer might be thinking about. In other words, would the servicer want to take a loss of $75 million today, or would they rather hang on and ride it out for another three to six years? The consequences of a $75-million loss is huge to a pool—it could wipe out a whole class of bonds.

The borrower wouldn’t know how to get that information let alone interpret the 55-page trustee report. Next, we have conversations with the special servicer and determine what conversations they are most interested in having. We flush through all of that, and we give the borrower all the options that we believe are available to them, based on all of these circumstances.

The borrower said they were happy to hand the property back, but that would mean a $75 million tax hit, and he’d have to write a check to the Internal Revenue Service for $30 million—none of us want that. So, we brought in a tax expert plus a real estate mortgage investment conduit expert to handle the REMIC issues in the CMBS deal. After numerous conversations, we arrived at a structure where the borrower can deed [in lieu] the property back to the special servicer and do a 1031 exchange in the process to delay their tax consequences.

There are times when other firms can come in and work with us on these solutions, for example a firm may come in and buy the note out of the pool and that also helps the borrower and the trust. This is in the case of the controlling class specifically, where the firm has a fair market value purchase option to buy a loan out of the pool.

What are the CMBS bondholders’ perceptions of borrower advocates?

The bondholders like to be really clear that they are behind the scenes. We deal with the master and special servicer, and sometimes you can work all the way through the process to get the approvals then you get to the controlling class representative (CCR), and they come back with some amazing additional condition that will kill the deal. You try to call them, but they hide behind this wall so information comes from other people. Everyone in the approval line at the servicer is afraid of them because ultimately they can hire or fire the special servicer. So, it’s a very interesting business. I’m not sure that bondholders are necessarily for or against borrower advocates. I think they are just focused on making sure they get everything they can for the trust and don’t have any concern for the borrower. That’s part of the problem with CMBS.

There was a day when the CCR would rely on the underwriting and approval recommendations from the special servicer, but over the past year and year and a half on the newly originated deals, these CCRs are very aggressive, active and will often kill deals at the eleventh hour.

Which property types pose the biggest challenge in your negotiations?

Retail. In my opinion, it’s because all of the malls need to be upgraded, and every day we wake up, and there’s another chain going out of business. What affects the tenant is going to affect the mall as a whole. Malls are feeling the brunt of the distress.

Shopping dynamics haven’t changed. If my mom is looking for a black skirt, the first thing my mom will do is go to a local mall and shop around until she finds one. If Stephanie was looking for a skirt, she’d probably only go online. I might do a little of both. But very rarely does a young person today go to a mall and walk around and try to find something. They just don’t do that. So malls, in order to be successful, have to become a lifestyle center—you have to have theaters, food courts and entertainment.

Are you extra busy with the CMBS maturity wall?

Yes, for sure. We do have a number of deals we’re working on that are not maturing in the next two years that have some issues, but the majority of the deals we’re working on are like the previous example I gave—borrowers that have $95 million loans with $20 million value who made payments up to now but are wondering, “How do I get out of this in 2017?” There’s no way to get out. They may look like performing loans today, but the borrower can’t go and get another loan, and even if they could, it wouldn’t make a bit of economical sense to go get another loan to pay this way overleveraged loan off.

What do you see yourself being busy with next year?

According to the rating agencies, there is $100 billion maturing in 2017 and about half will not be able to refinance and pay off. So that is where we are going to spend a lot of our time. We’re also noticing a lot more firms joint venturing with another firm or recapitalizing their company. REITs may be selling things off, and that involves the change of ownership of portfolios. We see a lot of that, and I think we will see a lot more of it in 2017.

We’re overly staffed right now, and some people have a little more capacity, but that’s intentional as there is a lot more work coming.

What’s next for 1st Service Solutions?

I do believe that a borrower advocate will always be needed. Some people ask what I’ll do after the maturities, in 2019 or whatever. A lot of maturities are being extended, so we don’t really get past the wall until 2020, in my opinion. I’m well aware of the fact that the industry has to morph or evolve into something different, but I don’t have the first real clue as to what that will look like five years from now. In 2005, all I was doing was assumptions and changes of ownership, there were no defaults in CMBS, so I didn’t even think of that. All we did was assumptions between 2005 and 2007. In 2008 those assumptions ground to a halt, and I started getting calls from owners I’d helped previously on an assumption who now needed help as they couldn’t make a payment.

Most people didn’t see [the credit crisis] coming in 2008, so I try to stay in tune with what is going on as there will undoubtedly be the need for something different again. We can always add to our services—I can think of 20 products right now—but I don’t want to dilute the value we have today and the need we have in the industry simply for borrower advocacy.