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New Language Addresses Servicer Reimbursements
Total Securitization -- Institutional Investor News (October 26, 2003)

Two recent commercial mortgage-backed securities deals included new language in their pooling and servicing agreements. Until now, securitization documents didn't have specific language to reimburse servicer advances if the loan was corrected without being liquidated or if the servicer was not collecting previously past due payments from the borrower. This language is expected to be widely used in upcoming securitizations, said Mary Metz, managing director and co-head of the CMBS group at Fitch Ratings.

The servicer's job is to provide liquidity, not long-term loans, to a trust when the borrower is not paying. The language in Bear Stearns Commercial Mortgage Trust 2003-PWR2 and Bear Stearns Commercial Mortgage Trust 2003-TOP12 was put into place to plug holes that were not considered in the early days of the commercial mortgage-backed securities market. Any advance deemed recoverable that is made prior to the time a loan becomes current will be reimbursed from principal payments. Interest payments won't ever be used to make these advances.

Servicers, while pleased that progress has been made on this front, say there is still a long way to go. "As an industry, the servicers and investors are all focusing on how and what we can do to make the language in the PSAs work to allow us some flexibility and also give us the protection we need to make the right decisions on advancing," said John Church, managing director at Wachovia Securities.

Stacey Berger, executive v.p. of Midland Loan Services, noted that this issue is not yet fully resolved. "There is not a solution that everyone has signed off on yet," he said. To address the overall issues of interest shortfalls, the servicers and the subordinate investors have been advancing position papers that are proposing solutions that could be adapted by the entire industry.



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