Rationale

S&P Global Ratings' rankings on Newmark Knight Frank (NKF) are ABOVE AVERAGE as a commercial mortgage loan primary servicer, and AVERAGE as a commercial loan special servicer. On June 17, 2020, we affirmed the rankings (please see "Newmark Knight Frank Commercial Mortgage Servicer Rankings Affirmed," published June 17, 2020). The outlooks for the rankings are stable.

Our rankings reflect NKF's:

• Experienced leadership in primary servicing, albeit with persistent staff turnover;
• Leading position among Fannie Mae and Freddie Mac lenders, which feeds NKF's main servicing volume;
• Augmented servicing capabilities, made possible by outsourcing certain repetitive servicing functions to Midland Loan Services (MLS), a primary servicer ranked ABOVE AVERAGE by S&P Global Ratings;
• Comprehensive internal control regime;
• Limited diversity among property types (i.e., predominantly multifamily) across both primary and special servicing portfolios;
• Small dedicated staff of special servicing personnel, which currently lacks stability, depth, and tenure; and
• Modest current special servicing volume, and a lack of recent real estate owned (REO) resolution activity.

Since our prior review (see "Servicer Evaluation: Berkeley Point Capital LLC," published Nov. 19, 2018), the following changes and/or developments have occurred:

• The primary servicing portfolio surpassed $43.4 billion in unpaid principal balance (UPB) during 2019, primarily due to an increase of 13.6% government-sponsored entity (GSE) business lines, while loan counts remained generally flat.
• During 2019, NKF moved the servicing group to Lower Gwynedd, Pa., which strategically consolidated offices and realigned functions. This allowed NKF to align its portfolio management teams by product type.
• NKF reported significant turnover of approximately 40% across its primary and special servicing staff during 2019, largely as a result of the office consolidation.
• In 2019, loan servicing was audited by a combination of Cantor Fitzgerald Internal Audit (Cantor) and an external third party.
• In March 2019, a director of servicing project management was hired to manage projects and oversee the MLS contractual relationship, while leading a project management and process improvement team of three employees.
• In March 2019, the vice president (VP) of special servicing left the company, with his position being filled by the promotion of an experienced internal candidate.
• The above-referenced VP of special servicing left the company in April 2020, and the senior managing director is overseeing the group on an interim basis until the position is permanently filled.
• In April 2020, NKF engaged four contract employees with non-performing loan experience from an NKF-affiliated company, Spring 11, to support its special servicing team.
• In April 2020, two experienced team members were transitioned to the special asset management group in order to enhance agency loss mitigation efforts, and also provide support to the special servicing group if needed.
• In late 2019, NKF established the basis for a "global center of excellence" office in India to provide specific back-office servicing support (i.e., not client facing) and hired a site director with extensive experience. This offshore consultant team will become full-time employees of Newmark Group Inc. (Newmark) in 2020, and will be expanded to support other Newmark business lines.
• A position dedicated to counterparty risk was created within the enterprise risk management and governance (R&G) team.
• NKF fully automated the watchlist and rating criteria into their data warehouse, allowing the report to be run on demand.
• NKF upgraded to Enterprise!® version 2015.3.MR8.

NKF maintains disaster recovery and business continuity plans, including response procedures to address operational disruption. In March 2020, the company implemented its plan due to the COVID-19 outbreak. Subsequently, management reported that there were no disruptions to the company's operations or data facilities, and that as of the date of this report all of its employees are working from home.

The outlooks for the rankings are stable. Like most servicers, we believe the company will face challenges in 2020 arising from the economic difficulties faced by borrowers resulting from the COVID-19 pandemic, particularly following a benign default environment. We further anticipate some transition time for the India operation to be fully staffed, which, once completed, are expected to allow for more efficient and streamlined servicing functions. NKF should also benefit from additional overseas working hours.

Nonetheless, we expect NKF will remain an effective servicer for its portfolio, which mainly consists of GSE loans. Given the small special servicing staff NKF employs, we expect the company will continue to make necessary adjustments depending on the magnitude of borrower defaults stemming from issues related to COVID-19.

In addition to conducting a remote site visit with servicing management due to COVID-19 concerns, our review includes current and historical Servicer Evaluation Analytical Methodology data through Dec. 31, 2019, as well as other supporting documentation provided by the company.

Profile

NKF is an indirect subsidiary of Newmark. Newmark is a publicly traded company that, through its subsidiaries (including Berkeley Point Capital LLC [BPC]), operates as a full-service commercial real estate services business with a complete suite of services and products for both owners and occupiers across the entire commercial real estate industry. Under the NKF name, the investor/owner services and products of Newmark's subsidiaries include capital markets, agency leasing, property management, valuation and advisory, diligence, and underwriting. Newmark's subsidiaries also offer GSE lending, loan servicing (i.e., BPC), debt and structured finance, and loan sales.

BGC Partners (BGC) acquired BPC in September 2017, and in December 2017, BGC made a public equity offering of Newmark, the real estate division of BGC, which included BPC. In November 2018, BGC completed the distribution/spin-off of all Newmark common stock that was owned by BGC to its common stockholders.

While public shareholders own majority economic control of Newmark, Cantor Fitzgerald L.P. maintains voting control of Newmark and its subsidiaries via ownership of a separate class of stock that has super-voting rights. Cantor is a private limited partnership whose regulated and unregulated subsidiaries conduct securities and commercial real estate brokerage, financing, and execution services for institutional clients in the U.S. and globally.

As of Dec. 31, 2019, according to management, Newmark had 6,500 employees in 500 offices across the U.S., including NKF's 60 employees with servicing and asset management-related roles. Newmark's Multifamily Capital Market primary offices are located in Bethesda, Md. Servicing operations are located mainly in Lower Gwynedd and Newport Beach, Calif., and include various asset management and special asset management activities. Special servicing asset management positions are located in Lower Gwynedd and Bethesda. The company completed its planned office consolidation at the end of 2019 and established the basis for a "global center of excellence" office in India which will be expanded to support multiple Newmark business lines.

As of Dec. 31, 2019, NKF's full serviced portfolio totaled $43.4 billion, with 2,168 loans (the majority being multifamily loans) in 47 states and Washington, D.C. The year-end 2019 portfolio, when compared to year-end 2017, has increased by 13.5% in UPB, with the loan count up modestly (see table 1). The company handles both full primary servicing, and also performs limited servicing for certain commercial mortgage-backed securities (CMBS) loans. The limited servicing portfolio involves only certain contractually agreed-upon aspects of loan servicing, which typically consists of collecting financial statements and completing property inspections.

NKF provides financing with Federal Housing Administration (FHA) mortgage insurance, and it functions as a Multifamily Accelerated Processing-approved lender. The company is a designated approved lender under Fannie Mae's Delegated Underwriting and Servicing (DUS) program. During 2019, NKF was a top ten DUS producer, closing $3.1 billion in Fannie Mae loans. As of Dec. 31, 2019, its Fannie Mae loan servicing portfolio exceeded $20.0 billion, approximately 46% of its total full primary servicing portfolio.

Since 1995, NKF has also been an approved Freddie Mac seller/servicer and is approved as a Targeted Affordable Housing lender with Freddie Mac. For 2019, NKF was a top ten Freddie Mac lender by volume. As of Dec. 31, 2019, its Freddie Mac servicing portfolio exceeded $17.5 billion (40% of full primary servicing UPB), including securitized loans in Freddie Mac K-deals totaling $15.7 billion.

Table 1

Table 2

Management And Organization

The management and organization subrankings are ABOVE AVERAGE for primary and special servicing.

Organizational structure, staff, and turnover

We believe that NKF's servicing management team and staff members possess the professional experience and expertise to effectively service loans in the company's portfolio. Its management team and staff exhibit above average levels of industry experience; however, employee tenure at all levels are below its peer averages, in large part due to persistently high turnover.

During 2019, total employee turnover (for primary and special servicing operations) was approximately 40% due to the above mentioned reorganization of the company, staff realignment, and consolidation of offices. These turnover levels are well above peers. While the realignment and consolidation of offices were planned, which allowed NKF to streamline its operations and align its portfolio management teams by product type, NKF's turnover has been consistently higher than most peers in recent years. With the completed company realignment, we will continue to monitor staff stability and the potential impact on rankings.

A senior managing director (SMD) oversees servicing and asset management, reporting directly to the CEO. The SMD has six direct reports with associated duties as follows:

• Asset management: financials, inspections, reserves, and payoffs.
• Operations: portfolio management, construction loan administration, investor services, loan administration, insurance compliance, new loan boarding, and insurance claims.
• Servicing project management: project management, operational enhancements, systems, servicing reports, and management of the MLS contract servicer relationship.
• India site director: offshore operations providing back-office support, including imaging documents, reviewing property inspections, spreading financial statements, reviewing replacement reserve requests, monitoring completion repairs, boarding new loans, setting up covenant tasks, and paying insurance invoices and loan surveillance/investor reports. (This new office was planned to have 100 employees by year-end 2020 to support the entire Newmark platform; however, hiring has been slowed by the pandemic.)
• Enterprise risk and governance: oversight of firm-wide risks and controls, with primary responsibilities including risk committees, compliance, and audit.
• Special asset management: borrower consents, loan risk ratings, default loan management, and watchlist loans.

All of the NKF multifamily capital markets' corporate support functions, including those for BPC, report to their respective Newmark corporate function heads, with a dotted line to the Chief Strategy Officer and President and Head of Multifamily Capital Markets. This includes support functions for human resources, technology, finance, accounting, and legal. Cantor is in charge of the internal audit function, and NKF's R&G group coordinates activities with Cantor.

The company's business model dictates that routine tasks (e.g., billings, payment processing, spreading property financials, Uniform Commercial Code (UCC) continuations and terminations, etc.) are outsourced to MLS. NKF's management believes this arrangement results in enhanced customer service by allowing its staff to focus on critical value-added areas of the business.

NKF recently organized a new loss mitigation group focused on the Fannie Mae credit risk portfolio. If needed, this group can assist the primary servicing team with agency forbearance requests. For Fannie Mae and HUD forbearances, the approval authority rests with the primary servicer in conjunction with agency regulations. For any forbearance requests related to Freddie Mac K-deals and Freddie Mac portfolio loans, NKF performs an initial review of documentation and refers the request to Freddie Mac or the Master Servicer for a final forbearance approval or denial.

A vice president with 15 years of industry experience and three years tenure with NKF led special servicing until departing the company in April 2020. At the same time, three other staff members left the special servicing team, with two staff reassigned to another NKF group and one resignation. The company has since filled one staff position and is looking to backfill the VP of special servicing position with an experienced candidate. Nonetheless, as result of the above changes to the special servicing group, the current special servicing team includes only one NKF employee and five Spring 11 contract employees. While Spring 11 is a Newmark-controlled affiliate, we view the lack of stability, depth, and tenure of the special servicing team as a ranking concern.

Table 3

Training

NKF provides its management and staff with a diversified array of ongoing, formal internal and external training programs, which is typical of similarly sized peers. Each employee is required to participate in at least 40 hours of training and educational events each year. During 2019, the staff (primary and special servicing) averaged 57 hours per employee. Additional training features include the following:

• Annual training plans are jointly developed between manager and employee, stressing progressive development and expanding job and industry knowledge.
• Training is delivered through a variety of mediums, including staff meetings, formal classroom training, and seminars (web-based and conferences).
• Training activity is tracked on Excel spreadsheets. We note that most ABOVE AVERAGE ranked servicers track training through a learning management system.
• Managers, accompanied by experts in servicing and asset management functional areas, deliver process training.
• Process maps and desktop procedures are utilized for new-hire training.
• Staff members are encouraged to participate in an array of the Mortgage Bankers Assn.'s commercial servicer training courses along with certification opportunities in some instances.

Systems and technology

We believe NKF has effective technology to meet its servicing requirements, although it lacks a dedicated system for special servicing. The company continues to focus on technology enhancement projects, internally and with Enterprise!, to further streamline and automate servicing tasks across various loan administration functions. Other notable features include the following:

Servicing system applications  

NKF operates in a suitably automated environment. The primary servicing system is integrated with additional applications for document tracking, risk management, and standard office automation tools.

NKF has utilized Enterprise! version 2015.3.MR8 since February 2018, while continuing to implement maintenance releases when available. The company has plans to upgrade to the recently released Enterprise! 2018 by year-end 2020. Specialized programs interface with the system to accommodate Fannie Mae DUS and other GSE investor reporting requirements.

Closer software, which is from a third-party vendor, is utilized in NKF's front-end originating, underwriting, and closing departments.

NKF employs a proprietary data warehouse system to allow users to create, edit, and schedule various queries and reports from Enterprise! data, including ad hoc query and reporting capabilities for servicing and asset management personnel.

Key aspects include the following:

• The Viewpoint reporting tool generates servicing metrics, consisting of over 175 reports for use by asset management and servicing as needed.
• Citrix ShareFile is an application used to store property inspections, financials, insurance pre-funding review documents, servicing transfer documents, and special asset management documents.
• Insurance Risk Management Application (IRMA) is an internally developed application for insurance tracking, insurance compliance, and communication with borrowers and agents. The application utilizes a nightly feed from Enterprise! to update policy data and start the insurance compliance review workflow. In 2019, the company began migrating data to the NKF Microsoft 365 Exchange Cloud environment. All data is expected to be moved by year-end 2020.
• As part of its licensing agreement with MLS, NKF utilizes IBM's FileNet document imaging application.
• The company has a mandate to separate NKF's systems from BGC's systems by the end of 2020, as BGC no longer has any ownership of the company. The work is in process and is expected to be completed by November 2020.
• NKF added new and enhanced system reports designed to improve workflow and oversight.
• NKF automated the watchlist engine to improve monitoring of distressed assets and detect early warning signs for potential defaults.
• The IRMA insurance system has strengthened controls around data integrity in Enterprise! by implementing a servicing form showing changes for critical servicing data points. Management now also has the ability to run insurance reports on demand through IRMA for specific time periods.
• NKF does not have a dedicated system for special servicing, unlike higher ranked special servicers. However, the Enterprise! servicing system offers functionality to serve as a system of record, including detailed tracking of monthly property-level cash flow performance, which special servicing reviews.
• Special servicing is supplemented with Microsoft Office products for credit cases, asset summary reports, resolution models, and net present value models.

Business continuity and disaster recovery 

NKF maintains written data backup, business resumption, and disaster recovery plans for its servicing operations. NKF's business continuity plan was moved under Cantor's corporate compliance umbrella in May 2019. Features of these include the following:

• All firewalls are kept up-to-date with the most current security patches to help fight against malware, worm, and virus threats. Antivirus is active on all company computers.
• Disaster recovery and business resumption plans are reviewed and revised annually, with the last tests completed in August 2019. Management indicated no significant issues were found.
• The most recent annual disaster recovery test with the MLS vendor for the Enterprise! system was conducted in August 2019, with no significant issues per management.
• NKF has the majority of their primary system backup locations at MLS sites in Richmond, Va., with secondary backup sites in Ashburn, Va. The balance of servicing data is replicated at various regional locations, which are located more than 25 miles from NKF's offices.
• All sites operate on separate power stations that are more than 25 miles apart.
• Per management, key servicing operations can resume within one hour of an emergency situation, and its recovery time objectives for all systems are two hours.
• NKF's disaster recovery plan is based on remote access capability and alternate work locations for their employees in the event of an emergency. The company has remote desktop capability available for all staff, with multifactor authentication required for remote logon.
• Due to the COVID-19 pandemic, NKF proactively added additional bandwidth to their platform prior to requiring 100% of their employees to work from home beginning in March.

Cybersecurity 

NKF maintains certain routine cybersecurity preparedness protocols, albeit to a lesser extent than most servicers we rank. Features include the following:

• An outside vendor conducts annual penetration testing, making reports available to executive management with detailed information on attempted cyberattacks. Management stated there were no significant issues noted from the Nov. 11, 2019, test.
• Employees are trained annually on anti-phishing compliance, but are not sent any phishing emails on a regular basis to test their compliance. We view this as a detriment to NKF's cybersecurity preparedness plan, and note that most commercial servicers we rank send phishing emails to their employees on a routine basis.
• NKF reported that they have a corporate attorney on staff to help with cybersecurity needs.
• NKF reported that they have a stand-alone insurance policy for cybersecurity issues.

Internal controls

We believe that NKF's risk management efforts--including its policies and procedures, and system of controls and governance--reflect a sound approach to maintaining a controlled servicing environment.

Policies and procedures 

NKF maintains documented policies and procedures for its asset management and servicing operations in an electronic format, which is available to all employees through the company intranet.

• The policies and procedures manual is formally reviewed and updated annually as part of a compliance review program.
• Since our last review, the policies and procedures have been continually updated showing approval signatures and dates.
• Depending on the significance of changes, they may also be communicated in a staff meeting or training session.
• NKF uses the DocuWiki application for its policy and procedures library.

Compliance and quality control  

NKF engaged an outside consultant for asset management and servicing to act as its internal compliance partner, and developed a three-year audit plan, including fieldwork and testing. This third-party vendor reports to the NKF enterprise R&G team, and also remains under the Cantor internal audit umbrella. The group specializes in mortgage servicing operational compliance and performs similar services for other loan servicers. The objective is to identify operational risk and provide feedback on all major servicing responsibilities, focusing on functions not already covered by Regulation AB (Reg AB) and Uniform Single Attestation Program for Mortgage Bankers (USAP) audits. Other features include:

• The vendor performs internal compliance testing on key servicing functions, including reviews of policies and procedures, staff interviews, and sample testing.
• Servicing and asset management teams utilize a combination of management reports, management oversight, and monthly metrics to ensure that loans are serviced according to the contractual requirements of investors, the loan documents, and regulatory requirements/laws. The vendor checks the current practices against these reports for compliance.
• The servicing metrics consists of over 175 reports generated from the ViewPoint data warehouse, as well as canned reports from the servicing system.
• NKF's compliance department conducts MLS quality control tests, the results of which are provided to management to ensure policies, procedures, and prudent servicing practices are being followed. These on-site tests are completed on a 24-month cycle, with the last test performed in October 2019 resulting in a satisfactory rating.

Internal and external audits 

We believe that NKF has a well-controlled servicing environment. All audits are managed through NKF's risk, governance, and modeling team. Our view stems from the following:

• The internal and compliance audits include mechanisms for tracking open items.
• The internal quality control/self-audit program monitors compliance on a weekly, monthly, and quarterly basis, depending on the activity.
• Beginning in 2019, NKF was included in Cantor's internal audit program. Cantor performed an audit of the new loan boarding function in September 2019. The audit identified one medium and one low priority finding that have since been addressed by management.
• Cantor's audit regime adopts a risk-based approach within the servicing platform to determine the areas to be audited.
• A third-party audit firm issued Reg AB and USAP compliance certifications in March 2020 for the calendar year ending 2019. Both reports denoted full compliance without any cited exceptions.
• Three large master servicers also perform annual reviews of NKF's primary servicing operations. Per management, there were no material findings in the last assessments.
• Fannie Mae performs a biannual assessment of NKF, with the last assessment in September 2018. Per management, no material findings were identified in this review.
• Freddie Mac also periodically performs an assessment of NKF. The last assessment was in September 2019. Management stated there were no material issues.
• Ginnie Mae completed its assessment in April 2020. Management stated there were no findings.

Vendor management

NKF has well-controlled and sound procedures governing vendor oversight. It engages third-party vendors to provide services, including financial statement processing, pre-funding insurance reviews, property inspections, flood zone determinations, and property tax services. The process includes the following:

• The NKF R&G team handles the company's vendor vetting process, contract reviews, and pricing.
• Vendor performance and contract compliance are monitored through quality controls, random sampling, vendor scorecards, and vendor site visits. MLS also monitors vendor compliance in its processes. Feedback regarding vendors is obtained from asset managers.
• Current vendors each have specific service-level agreements with NKF.
• Cantor Commercial Real Estate's (CCRE's) corporate strategic sourcing group assists with contract negotiations and other projects as needed.

Insurance and legal proceedings

NKF has represented that its directors and officers, as well as its errors and omissions insurance coverage, is in line with the requirements of its portfolio size. As of the date of this report, there were no material servicing-related pending litigation items.

Loan Administration – Primary Servicing

The loan administration subranking for primary servicing is ABOVE AVERAGE.

NKF's full serviced primary servicing UPB has increased 6.4% since our last review. Within the portfolio, NKF reported no delinquencies as of Dec. 31. 2019, which is consistent with their multifamily-centric peers and is in line with the overall low delinquency levels in the portfolio over the last several years (see table 4). While NKF has reported little to no delinquencies for the last several years, we would expect to see these rates increase during 2020 because of the COVID-19 pandemic.

The overall full servicing portfolio lacks meaningful diversity among property types, with an emphasis on multifamily, which represents 86.4% of property count and 85.3% of UPB (see table 5). At the same time, the portfolio contains a varied geographic mix with properties located in 47 states; the top three states by geographic distribution are California (15.8% by UPB), Texas (15.3% by UPB), and Florida (9.5% by UPB). The portfolio's top investor types are GSE loans (86.9% by UPB), CMBS loans (5.8% by UPB), FHA loans (3.5% by UPB), and life insurance company loans (3.4% by UPB) (see table 6).

Table 4

Table 5

Table 6

New-loan boarding

Based upon its stated practices and written procedures, NKF has an effective loan setup function. Controls and other features of new loan setup include the following:

• A new loan boarding team member manually enters the new loan data from the closing documents into Enterprise! The team targets six business days to board essential loan data for all new loans.
• NKF uses an automated data feed across all data elements for limited subservicing of their CMBS loans. In instances where NKF is appointed the primary servicer for CCRE-originated loans, data is entered manually.
• The group boarded 191 new loans during the last half of 2019, and 320 loans boarded during the full year, including limited subservicing CMBS loans.
• Borrowers receive a detailed welcome package that contains a servicing procedures guide within 10 days of loan closing. Prior to 2020, the timeframe was 15 days, but delivery was streamlined to be more in line with peers.
• The operations team receives detailed insurance, tax, letter of credit, and UCC filing information. The team then forwards the information to topic specialists who input this data manually into the servicing system.
• The servicing system's data points are compared with original input documents and other key data points as part of the quality control review process that is completed by the new loan boarding team.

Payment processing

NKF outsources daily cash processing activity to MLS. PNC Bank N.A., the parent company of MLS, acts as the custodial bank. The transaction-processing unit at MLS oversees loan payment processing and posts all receipts, as directed by NKF. The MLS payment processing function operates efficiently with a high level of automation. Further payment processing details include the following:

• As of Dec. 31, 2019, loan payments were received and posted electronically through Automated Clearing House (ACH) drafts (85% of total), wire transfers (10%), or lockbox (5%), with no checks collected at the servicer's office.
• Duties for the receipt and deposit of funds, batch processing, and payment posting are appropriately segregated.
• Bank account reconciliations, which undergo multiple levels of approvals including from the VP of investor services, are completed as part of the outsourcing relationship.
• All phases of these processes require supervisory sign-off, and all newly originated CCRE loans include an ACH payment requirement.

Investor reporting

NKF has adequate experience with Fannie Mae, Freddie Mac, CMBS, and life insurance company loan reporting requirements. NKF has dedicated staff for the various investor reporting, and its operational accounting activities are properly segregated for reporting, remitting, and the related account reconciliation processes. Noteworthy features include the following:

• The team performs all elements of investor reporting and remitting electronically.
• Investor remittance, reporting, and account reconciliation tasks are segregated among staff, and all phases require supervisory sign-off.
• Enterprise! produces the Commercial Real Estate Finance Council investor reports, among other management reports.
• Automated bank account reconciliation and cash management systems with full access to online bank activity enable the company to remit funds timely and effectively monitor a high number of daily banking transactions and related reconciliation tasks.
• During the second half of 2019, NKF reported that it did not incur any penalties for late reporting or late remitting.

Escrow administration

We believe the company has sound controls for escrow administration activities. Highlights include the following:

• NKF outsources most of its tax escrow processing to MLS in order to benefit from their contract with CoreLogic, who automates tax payment processing to taxing authorities and provides non-escrow tax reporting.
• NKF sets up all tax data in Enterprise! and provides a copy of the legal description to MLS for newly funded loans. In addition, it obtains verification of paid taxes from borrowers for non-escrowed loans and forwards it to MLS for system updates.
• CoreLogic, through its contract with MLS, monitors property taxes for both escrowed and non-escrowed loans, and pays property taxes for escrowed loans.
• MLS uploads tax files received from CoreLogic to NKF's system and applies an approval code for CoreLogic to pay taxes. MLS posts disbursements from the escrow account on loans where taxes are paid within 10 days of taxes being due. MLS then sends the funds to CoreLogic.
• NKF has streamlined the process for returning escrow balances on paid-off loans to the borrower within 30 days of the loan's pay-off date.
• Based on loan count (excluding limited subservicing), approximately 78% of the loans had tax escrows as of Dec. 31, 2019, with no late payments reported during the last half of 2019.
• Associated tax policies and procedures are complemented by a range of quality control reports that are automatically delivered via email to key personnel and can be run in the system as needed.
• NKF's staff performs insurance compliance management using its proprietary IRMA application, complemented by a range of insurance quality control reports generated by IRMA as needed.
• Upgrades to IRMA during 2019 included insurance requirements programmed into the system, additional data points added for tracking compliance reviews by management, and an enhanced flood requirement/compliance tracking system.
• Insurance provider ratings are reviewed semiannually, with any downgrade notifications reviewed and addressed by the team. Based on loan count (excluding limited subservicing), approximately 52% of loans had insurance escrow accounts as of Dec. 31, 2019.
• All insurance due dates are tracked through Enterprise!, which issues system-generated renewal notices for borrowers. The company has a proactive policy of issuing notices to borrowers 30 days before the policy renewal date, along with subsequent notices as needed.
• Insurance policy coverage and compliance reviews for new loans are handled by a consultant. NKF's internal staff review insurance policies upon loan renewals to ensure compliance with investor and loan documents.
• As of Dec. 31, 2019, the company had no loans on its force-placed policy. The policy provides for 365 days of retroactive coverage.

Asset and portfolio administration

We believe NKF has sound procedures covering asset and portfolio administration tasks, with dedicated staff supporting the area. Additionally, the company engages MLS to perform repetitive servicing functions such as property financial statement collection, data input, and image scanning. NKF retains all quality control reviews, credit decisions, and analytical accountability. Highlights include the following:

• For its portfolio (excluding CMBS), NKF collected 100% of the 2018 annual statements portfolio-wide by Dec. 31, 2019, and reviewed 100% of all statements by that date. For its CMBS portfolio, NKF collected 99% of the 2018 annual statements portfolio-wide by Dec. 31, 2019, and reviewed 99% of the statements by that date. Financial statements are analyzed, commented on, and uploaded to investors per requirements.
• Enterprise! houses NKF's operating statement data and can provide detailed reports for management to review and identify trends.
• NKF has a relationship with a third-party vendor who performs collateral site inspections and tracks timely receipt of completed reports. All properties due for inspection during the second half of 2019 were completed.
• Unlike many other ranked servicers, NKF does not perform quality control checks on their third-party vendor inspections. Management stated they have used their vendors for some time, and are comfortable with the quality of their work.
• NKF servicing specialists set up UCC information in Enterprise! They monitor the portfolio weekly, identifying UCC continuations over the next six-month period and prepare the necessary filing packages.
• NKF forwards continuation packages to a third party for filing, and then updates Enterprise! with the date sent for filing.
• Servicing specialists image the UCC acknowledgement to the loan document tracking system and provide management reports to monitor the UCC process.
• Enterprise! automatically generates monthly bills for adjustable rate mortgage (ARM) loans (16.5% of the portfolio) that have an interest rate based upon an index plus a set spread. MLS manually maintains the Enterprise! index table, with staff conducting regular ARM index audits. The input and quality control of index rates are outsourced to MLS.
• NKF utilizes an automated risk-rating engine that flags loans for the watchlist based on various performance triggers, ultimately relying on its senior staff members' judgement to confirm the final risk rating.
• Previously, the watchlist included 13 reports run individually with macros, which required manual intervention. NKF's automated watchlist is now directly built into the data warehouse, which produces one report using the Viewpoint application. The rating criteria is also built into the report and, according to management, the new streamlined process saves a considerable amount of time.
• Asset management includes substandard property inspections and property financials into the watchlist for review.
• The asset manager may identify additional collateral performance issues based on qualitative factors not captured by the risk-rating engine, which will then cause an asset to be added to the watchlist.

Borrower requests

NKF addresses borrower requests in a proactive manner. Highlights include the following:

• The company has a separate dedicated team to work on borrower consent requests. A designated person is assigned as a liaison for each borrower relationship.
• NKF sends periodic borrower satisfaction surveys to their borrowers, which management reported as being generally positive.
• An asset manager prepares and analyzes the written proposals that address borrower requests, including a review of property financials and an inspection, with approvals granted by senior asset management staff.
• Thorough internal reporting mechanisms are in place to track resolution times and control the aging of borrower requests.
• NKF processed a total of 198 requests during 2019, including 53 management changes, 34 leasing consents, and 9 defeasances, as well as various other collateral requests.

Early-stage collections

NKF's delinquencies have remained minimal over the last several years. However, as mentioned, we believe that NKF will face an increase in delinquencies during 2020 due to the COVID-19 pandemic. NKF has nine primary servicing specialists allocated to handle early-stage collections. Noteworthy features include the following:

• Calls are made immediately after the grace period's expiration on delinquent loans, with Enterprise! automatically generating written notifications within two days of the grace period's expiration.
• At the 30th day of delinquency, portfolio managers send an additional letter advising the borrower that default interest has begun to accrue.
• Shortly thereafter, in conjunction and upon agreement with the investor, special asset management sends a notice of default to the borrower.
• Additionally, a delinquency report is distributed internally to all senior managers and some investors, depending on servicing requirements, so they have an opportunity to provide additional guidance.
• Typically, by the 45th day of delinquency, the loan is either prepared for transfer to special servicing or is directly handled by the investor, depending on whether the loan is part of a securitization or a private pool.

Loan Administration – Special Servicing

The loan administration subranking for special servicing is AVERAGE.

As of Dec. 31, 2019, NKF was the named special servicer for nine Freddie Mac K-deals with a combined UPB of $2.4 billion (including 558 loans). The overall active volume of specially serviced loans remains modest, with NKF having 16 loans (a combined total of $90 million in UPB) in its portfolio as of Dec. 31, 2019 (see table 7). Additional special servicing responsibilities include handling delinquent and surveilling watchlist loans. The construction loan responsibilities this group handled in the past were moved to the portfolio management group during the aforementioned realignment.

NKF has built a modest track record of managing and disposing of troubled assets nationwide, many of which were collateralized by multifamily assets. Special servicing is based mainly from its Lower Gwynedd office. In December 2019, NKF reported four full-time employees dedicated to handling both loan workouts and REO asset management (all of whom have subsequently departed the group, as noted below). The company also relies on a vendor to assist with modeling, consent underwriting, and report compilation, with the vendor contractors making no credit decisions on collateral.

NKF's special servicing expertise generally focuses on multifamily properties, in particular GSE loans. During the 18 months ending Dec. 31, 2019, NKF has resolved 15 multifamily loans, reflecting limited diversity in its resolution strategy. Five were payoffs and 10 were returned to master servicing (see table 8). Average resolution periods have slightly decreased since our last review, and full payoffs and returns to master servicing continue to be the most prevalent outcomes since 2015. The company has reported no foreclosure activity since 2014.

In April 2020, the VP of special servicing left the company, two special servicing full-time employees made internal moves to another NKF department, and another left the company; one new team member was hired. In light of 100% turnover of the special servicing staff, NKF subsequently engaged four contractors, most with non-performing loan experience, from Spring 11, a Newmark subsidiary. This group is reporting to the SMD until NKF identifies a head of special servicing. A loss mitigation group of two was also created from internal personnel, with oversight from the managing director of enterprise R&G, which can assist special servicing as needed. The significant turnover and the engagement of contractors to manage the special servicing assets, particularly during the onset of a recession, is a ranking concern.

Through early May 2020, there has been just over 40 forbearances granted on the loans in the Freddie Mac K-deals for which NKF is the appointed special servicer. Management stated that, although they are notified of forbearance requests, they are not involved in the approval process because the master servicer holds that authority.

Table 7

Table 8

Loan recovery and foreclosure management

NKF displays adequate loan recovery and foreclosure management protocols to efficiently resolve non-performing loans, with a primary expertise and track record in the multifamily property type. NKF has established the following procedures:

• Borrowers are required to sign a pre-negotiation letter.
• Asset-level business plans are required within 30 days of loan transfer. The plans provide all necessary details and a proposed resolution strategy.
• Asset managers complete their business plans using a standardized template from Microsoft Office applications.
• Asset managers regularly update business plans and asset status reports for review by senior management.
• Asset managers make foreclosure recommendations based on a delegated authority matrix, which the department manager reviews (or SMD in their absence) before submitting to the appropriate delegated authority for final approval.
• Given there is only one NKF special servicing employee, the SMD currently has final sign-off on all transactions until they fill the head of special servicing position.
• Approvals may include client sign-off as well. All asset resolution strategies go through the same process for approval.

REO management and dispositions

NKF has established procedures governing its REO oversight function; however, there has been no history of REO loans for at least the last five years. Should the need arise, NKF would follow the below procedures:

• Property managers and brokers are engaged using approved vendor lists. Standard contracts would be used for vendors.
• Asset managers would monitor property managers' adherence to a procedure manual for reporting and compliance.
• Asset managers would prepare an REO business plan and budget within 30 days of acquiring title. The approval process for the plan and budget is similar to that used for loan business plans, with the SMD approving all transactions until a managing director of special servicing is hired.
• Business plans would be tracked through Enterprise!
• All sale bids must be submitted to the appropriate delegated authority for final approval. Given its primarily GSE-related portfolio, their Fannie Mae investor has historically coordinated the closing process.

REO accounting and reporting

NKF's documented controls and procedures for property-level accounting and oversight are adequate. Highlights include the following:

• Asset managers and servicing staff monitor monthly property management operating account activity.
• Procedures call for control of property management income and expenses through a single trust account that is segregated for each loan and is reconciled monthly.
• NKF does not have a formal program to conduct on-site accounting or operating audits of their property management companies; however, best practice dictates that these be completed in the event NKF accumulates an REO portfolio in the future.

Subcontracting management

NKF handles the management and oversight of subcontractors in an effective manner and follows the following guidelines:

• NKF's legal department maintains approved lists of property managers, brokers, attorneys, appraisers, and engineers.
• NKF checks business references on all vendors before inclusion on the approved vendor list. It also rates and tracks vendor performance.
• In general, NKF assigns third-party vendors from approved vendor lists based on property type and location, along with the vendor's past experience and performance. The vendor list approval process is handled by the NKF R&G group. The special servicing group engages the necessary vendors on an asset-level basis.
• Asset managers monitor third-party compliance according to performance and timeline guidelines. The asset managers use the in-house NKF support staff of appraisal, legal, and engineering teams to perform a second-level review and to approve vendor work.
• Staff produce various tracking reports to assist in weekly and monthly management reviews.
• The Enterprise! task management system can track all contracting bids and work products for appraisals, environmental work, and engineering studies.
• SMD provides oversight of Spring 11 contractors supporting special servicing for modeling, consent underwriting, and reports.

Legal department

The special servicing department generally uses external counsel for all loan-level needs. Other aspects include the following:

• All oversight of external legal engagements and ongoing service levels are handled by NKF's internal corporate counsel.
• NKF leverages the services of CCRE's general counsel as the need arises.
• Asset managers review and approve legal bills before payment.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Newmark Knight Frank Commercial Mortgage Servicer Rankings Affirmed, June 17, 2020
• Select Servicer List, May 1, 2020
• U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
• Newmark Group Inc., Nov. 26, 2019
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019
• Servicer Evaluation: Berkeley Point Capital LLC, Nov. 19, 2018