|Servicing category||Overall ranking||Management and organization||Loan administration||Outlook|
|Commercial primary||ABOVE AVERAGE||ABOVE AVERAGE||ABOVE AVERAGE||Stable|
|Commercial master||ABOVE AVERAGE||ABOVE AVERAGE||ABOVE AVERAGE||Stable|
|Commercial special||ABOVE AVERAGE||ABOVE AVERAGE||ABOVE AVERAGE||Stable|
S&P Global Ratings' rankings on First National Financial L.P. (FNF) are ABOVE AVERAGE as a Canadian commercial mortgage loan primary, master, and special servicer. On Nov. 6, 2020, we affirmed the rankings (please see "First National Financial L.P. ABOVE AVERAGE Commercial Servicer Rankings Affirmed; Outlook Stable," published Nov. 6, 2020). The outlook on each of the rankings is stable.
Our rankings reflect FNF's:
- Experienced management team and staff with good overall tenure, albeit with certain leadership turnover during 2020;
- Sound internal audit program;
- Detailed policies and procedures, which are reviewed and updated annually;
- Solid technology and systems environment;
- Portfolio of property and investor types that are limited in diversity and are primarily focused on multifamily loans; and
- Well-designed default management control environment, albeit with limited delinquency volume in the primary and special serviced portfolios, which limits management's ability to fully assess its controls.
Since our prior review (see "Servicer Evaluation: First National Financial L.P.," published July 25, 2018), the following changes and/or developments have occurred:
- In November 2019, the chief operating officer (COO) was named president of FNF, and now holds the titles of president and COO.
- FNF completed its transition to the new Day Force software, which integrated the existing human resource and training applications to a single platform.
- FNF now uses Microsoft Power BI to produce more dynamic reports with better visualization.
- FNF adapted to a work-from-home environment in response to the COVID-19 pandemic.
- Since Dec. 31, 2017, the primary serviced portfolio has generally remained flat by loan count, but the overall unpaid principal balance (UPB) has increased to C$31.4 billion from C$22.9 billion due to a larger average loan size.
- FNF serves only as the master servicer on 161 loans totaling C$1.42 billion in UPB, which is a 50.8% increase since our last report. FNF is both the primary and master servicer on an additional 13 commercial mortgages.
- In June 2020, the senior manager of commercial servicing retired. She was replaced in September by a new hire with 25 years of commercial servicing experience.
FNF maintains a disaster recovery and business continuity plan, including response procedures to address operational disruption as a result of a pandemic event. In March 2020, the company implemented its plan due to the COVID-19 pandemic. Management reported that there were no disruptions to the company's operations or data facilities. The majority of FNF's employees have been working remotely, except a handful of employees who prefer to go into the office and are taking social distancing precautions.
The outlook on each of the rankings is stable. We believe FNF, like most servicers, could face operational challenges associated with potential additional payment relief requests or managing an increased volume of mortgage loan delinquency should the economic downturn persist beyond the terms of the payment deferrals already granted to borrowers. We expect that management will redeploy or add staffing resources as needed should delinquencies rise. We will continue to monitor FNF's portfolio performance and default resolution effectiveness.
In addition to conducting a virtual meeting with servicing management, our review included current and historical Servicer Evaluation Analytical Methodology data through June 30, 2020, as well as other supporting documentation provided by the company.
|Servicer name||First National Financial L.P.|
|Primary servicing location||Toronto|
|Parent holding company||First National Financial Corp.|
|Loan servicing system||Optimus|
FNF was founded in 1988 as a mortgage company to originate and service residential and commercial mortgage loans. It started offering and servicing multifamily residential and commercial mortgage loans in 1990, including construction lending for multifamily and condominium developments. The original principal partners still manage the company.
FNF is the largest nonbank commercial lender and Canada Mortgage and Housing Corp.'s (CMHC's) largest insured multifamily lender. FNF has offices in Toronto; Montreal; Vancouver; Halifax, Nova Scotia; and Calgary, Alberta. The company originates loans in all 10 Canadian provinces and three territories. The headquarters and centralized servicing operations are in Toronto, and it provides servicing to institutional investors on balance sheets, as well as through securitizations.
The parent company of FNF, First National Financial Corp., is a Canadian originator, underwriter, and servicer of predominantly prime residential (single-family and multifamily) and commercial mortgage loans. With slightly over C$111 billion in mortgage loans under administration, FNF is Canada's largest nonbank mortgage originator and underwriter and is among the top three in the Canadian mortgage broker market.
FNF's primary servicing portfolio comprises 65% bank and financial institution investors, based on UPB, and it continues to experience growth in UPB even as the number of assets it services generally remained flat by loan count. The master serviced loan portfolio has grown significantly to C$1.4 billion as of June 30, 2020, from C$943.0 million as of Dec.31,2017, as the commercial mortgage-backed securities (CMBS) market experienced an uptick in activity (prior to COVID-19) while the company was actively seeking such opportunities. The special servicing portfolio, which currently has no assets, has had little resolution activity since our last report. FNF is presently the named special servicer on 176 loans with a UPB of approximately C$1.5 billion.
FNF expects continued increases in its master servicing portfolio consistent with the anticipated growth of its Montreal and Vancouver operations. It also plans to deepen its lending relationships in those key markets and transition the business into focusing on the borrower experience in an effort to win repeat business.
|Total Servicing Portfolio|
|UPB (mil. C$)||YOY change (%)(i)||No. of assets||YOY change (%)(i)||No. of staff||YOY change (%)|
|June 30, 2020||32,816.9||7.0||5,562||(0.3)||17||(11.9)|
|Dec. 31, 2019||30,661.3||16.8||5,577||2.8||19||(14.1)|
|Dec. 31, 2018||26,252.6||10.2||5,424||0.3||22||0.0|
|Dec. 31, 2017 (ii)||23,826.8||7.1||5,407||(3.5)||22||(4.3)|
|Dec. 31, 2016||22,238.9||-||5,606||-||23||-|
|June 30, 2020||0.0||-||0||-||4||(33.3)|
|Dec. 31, 2019||0.0||-||0||-||6||(25.0)|
|Dec. 31, 2018||0.0||-||0||-||8||0.0|
|Dec. 31, 2017||0.0||(100.0)||0||(100.0)||8||0.0|
|Dec. 31, 2016||11.4||-||2||-||8||-|
|(i)June 30, 2020, YOY change based on the prior year end. (ii)Year-end 2017 data may vary from originally published data due to additional information received. YOY--Year-over-year. UPB--Unpaid principal balance.|
|June 30, 2020||Dec. 31, 2019||Dec. 31, 2018||Dec. 31, 2017(i)||Dec. 31, 2016|
|UPB (mil. C$)||No.||UPB (mil. C$)||No.||UPB (mil. C$)||No.||UPB (mil. C$)||No.||UPB (mil. C$)||No.|
|Master (SBO) loans||1,422.6||161||971.9||117||892.4||141||943.1||144||898.7||123|
|Average loan size||5.9||-||5.5||-||4.8||-||4.4||-||4.0||-|
|Total special servicing||0.0||-||0.0||-||0.0||-||0.0||-||11.4||2|
|(i)Year-end 2017 data may vary from originally published data due to additional information received. Totals may not add due to rounding. SBO--Serviced by others. REO--Real estate owned. UPB--Unpaid principal balance.|
|Portfolio Breakdown By Property Type And Province(i)|
|UPB (mil. C$)||UPB (%)||No. of properties||Properties (%)|
|(i)As of June 30, 2020. Totals may not add due to rounding. UPB--Unpaid principal balance.|
|Total Portfolio by Investor Product Type(i)|
|Loan type||UPB (mil. C$)||UPB (%)||No. of loans||Loan count (%)|
|Other third-party investors||1,821.0||5.5||361||6.5|
|On own or parent's balance sheet||953.9||2.9||198||3.6|
|Life insurance companies||894.8||2.7||128||2.3|
|(i)As of June 30, 2020. Totals may not add due to rounding. UPB--Unpaid principal balance.CMBS--Commercial mortgage-backed securities. CDO--Collateralized debt obligation. ABS--Asset-backed securities. UPB--Unpaid principal balance.|
Management And Organization
The management and organization subrankings are ABOVE AVERAGE for primary, master, and special commercial mortgage loan servicing.
Organizational structure, staff, and turnover
While we believe FNF has an experienced, sufficiently tenured management team and staff, there have been key management changes since our last visit. The COO, who has been with the company since 2004, was named president in November 2019 and he now holds the positions of president and COO. The combined commercial mortgage operations group is now led by a highly experienced and tenured senior vice president (SVP), who has been with the company for 16 years. The former senior manager of commercial servicing retired from the company in June 2020. Her duties were then handled by two experienced employees reporting to the manager of commercial servicing until September, when she was permanently replaced by an external candidate with 25 years commercial servicing experience.
The FNF management team and staff exhibit above-average levels of industry experience. Although we noted some senior management turnover in early 2020, the overall turnover at this level is similar to peers. We also noted staff turnover was greater than peers during this time. Given the overall tenure, training, and technology at FNF, we believe the recent turnover is manageable.
FNF's operations include the typical mortgage banking functions of originating and loan servicing. Additional corporate support is provided by First National Financial Corp., including human resources (manages payroll, benefits, and employee hiring), accounting (manages movement of funds and provides account reconciliations), audit/finance (ensures FNF's compliance with responsibilities to various stakeholders), and information technology (IT); provides solutions for efficient and effective ways to conduct business, in addition to general office and employee support).
There are 17 staff members dedicated to the primary and master servicing of commercial mortgage loans, which is a slight reduction from the 19 employees at year-end 2019. There are also four other staff members assigned to special servicing who are cross-trained and sourced for other operational functions given the current low special servicing volumes. While some volumes have increased, management believes that due to FNF's technology and experienced employees they are adequately staffed. This commercial operations group reports to the senior vice president of commercial mortgages, who has been with the company for 16 years. He in turn has four direct reports, including two senior manager/directors and two assistant vice presidents who represent operations, servicing, credit, and finance. Management believes that each of these department heads have adequate staff reporting to them to handle the commercial mortgage loan business operations.
Per management, there were no operational disruptions, despite leadership departures during 2020 and the COVID-19 pandemic, which resulted in the vast majority of its employees working remotely since mid-March.
|Years Of Industry Experience/Company Tenure(i)|
|Senior managers||Middle managers||Asset managers||Staff|
|Industry experience||Company tenure||Industry experience||Company tenure||Industry experience||Company tenure||Industry experience||Company tenure|
|(i)As of June 30, 2020. N/A--Not applicable.|
We believe FNF has a competent education curriculum for all new hires. FNF also offers continuing education for tenured employees. Companywide, FNF has 13 people in the training group supporting residential servicing, residential underwriting, and commercial operations. Training features include the following:
- A mentoring program that is coupled with formal classroom training to provide what we believe is an effective training curriculum, using full-time training staff to manage these requirements.
- For new hires, training has been streamlined since our last review to help new associates integrate faster with the team. FNF reduced formal classroom training for new hires to 12 days from 17 days so employees can move to on-the-job training sooner. On-the-job training includes e-learning modules, call training queues, as well as traditional side-by-side training and coaching.
- New-hire training also highlights specific topics and focuses on informative tips that are designed to introduce newer employees to the company and its operations.
- The training manager continues to work with e-learning designers to make the training modules more interactive.
- Training is tracked and administered through the PeopleFluent learning management system.
- FNF requires employees to complete its annual online courses that address private information and changes to privacy laws.
- All commercial servicing employees are required to complete 36 hours of training per year. During 2019, the actual average training fulfilled by primary, master, and special servicing employees was 30, 45, and 11 hours, respectively, thereby falling short of their stated goal in some instances. As of June 30, 2020, management reported 20, 16, and 6 average training hours for these same groups, which is trending below the targeted amounts for the first half of the year.
FNF adapted to a remote training environment for new hires to deal with the operational changes necessitated by the COVID-19 pandemic. The adaptations include:
- Developing a coach support system;
- Utilizing Microsoft Teams to deliver virtual classroom training;
- Creating a training call queue where training specialists call in and new hires practice call management skills; and
- Using a screen-sharing application for trainees and coaches to view the work being performed.
FNF launched new software in 2018, which consolidated its human resource and training applications to a single platform.
Systems and technology
We believe FNF has effective technology to meet its commercial servicing requirements. The company continues to focus on technology enhancement projects to further streamline and automate servicing tasks across various loan administration functions. FNF has well-designed data backup routines and disaster recovery preparedness.
Servicing system applications
Optimus (a Marlborough-Sterling product) has been the main servicing system for both residential and commercial mortgage loans since 2001. FNF utilizes version 4.5 of Optimus, which runs on an AS400/DB2 platform and interfaces with FNF's general ledger. Other notable features include the following:
- An investor portal provides portfolio, assets, and property-level information to assess pool and loan performance.
- The Microsoft Power BI tool is used to generate more dynamic team reports, which have better visualization than the previously generated Excel reports. FNF moved 68 reports onto this system by third-quarter 2020.
- FNF's data processing operations are sufficiently automated and staffed. FNF has a default management risk-analysis screen to help facilitate reporting to investors and loan insurers.
Business continuity and disaster recovery
FNF's disaster recovery and business resumption plan is sufficiently detailed. The deployment of its disaster recovery and business resumption plan in response to the COVID-19 pandemic was a live test of its program. FNF reported no issues with the implementation of its work-from-home strategy nor any service disruptions with its vendors. Details of its plans include the following:
- FNF performs a test of its recovery plan annually. The most recent full test was on June 6, 2020, with no issues noted.
- FNF's data backup sites are located in Markham and Mississauga, Ontario., which are both adjacent to Toronto. These locations are under 30 kilometers away from the home office but are on a separate power grid from Toronto. Having backup locations this close to the central location is not a best practice.
- FNF has an agreement with a major systems supplier to provide an emergency operations center (EOC). This EOC has seating for 150 employees, 24 hours a day, for a minimum of two weeks.
- Employees also have the capability to work from home and have been doing so during the COVID-19 pandemic without issue, per management. While some employees choose to come into the office, it is not mandatory, and those employees practice social distancing.
- All core systems are replicated in real time and backed up to tape daily.
FNF has IT staff and procedures dedicated to cyber security and its information security program. Program highlights include the following:
- There is a defined incident response plan in the event of a security breach that includes measures to close any gaps and prevent future issues.
- IT generates and monitors user network and application password updates, and managers review and validate user access semiannually.
- FNF uses real-time network intrusion monitoring to identify suspicious or malicious activity. An external, independent vendor conducts annual penetration testing on the system, and there were no significant issues noted during the last test in June 2020. Additionally, FNF conducts internal penetration testing on a routine basis.
- FNF sends monthly phishing emails to their employees to test awareness.
- The company has a stand-alone cybersecurity insurance policy and access to a cybersecurity attorney as needed.
- The company's IT department works closely with internal legal counsel and audit teams to ensure they are taking necessary precautions to protect access to the borrowers' personal information and adhering to all applicable laws and requirements.
- All employees are required to complete annual training courses related to information privacy and security, including online cybersecurity courses, social engineering, and email security training.
We believe FNF's internal audit function, coupled with external audits and its portfolio composition, is effective in mitigating risk and monitoring compliance with its own servicing standards, investor requirements, and those of the mortgage insurers (CMHC, Genworth Financial, and Canada Guaranty).
Policies and procedures
We believe FNF's policies and procedures manuals include detailed process descriptions and adequately address all critical areas of servicing. The manuals are available online and in hard copy for all employees. A dedicated employee is responsible for managing the updates and provides them as needed. Senior managers review and approve all updates and suggested changes before they are implemented.
Compliance and quality control
FNF does not have a dedicated team to perform compliance and quality control testing for mortgage loan servicing. Its in-house attorneys and managers are responsible for the change control process associated with any legislative changes. The lack of frequent, transactional testing, which is normally performed by a compliance group focused on regulatory and investor requirements, is an increased risk, though it is mitigated by the audits performed through the internal audit group as well as external parties.
Internal and external audits
FNF has an internal audit program for operations that consists of three full-time employees, which is an increase of one since our last review. We believe this team has sufficient education and industry experience. The audits and review schedule are designed to address and satisfy traditional risk assessments and performance methodologies through loan-level sampling to assess adherence to stated policy and servicing standards. Features of the audit function include the following:
- The risk committee meets annually to discuss the risk assessment. Risk levels are determined by the internal audit group based on various items such as inherent risk, past audit experience, operational changes, or any new compliance requirements.
- The audit cycle varies based on the risks but is performed at least every 24 months for commercial servicing operations and every 12 months for residential servicing operations.
- Internal audit issues are reported quarterly to the board of directors and the audit committee.
- Audits for information security are co-sourced with a vendor who provides the necessary expertise.
FNF provided a summary of the most recent internal audits and no material issues were identified.
In addition to its internal audit process, FNF is subject to external audits by insurers and regulators. While we were not given access to these reports, management stated that there were no issues identified in those audits. FNF also completes an annual Uniform Single Attestation Program review and was in compliance, with no exceptions noted for the 2019 review. The Canadian Standard on Assurance Engagements 3416 Report from Oct. 1, 2018, through Sept. 30, 2019, contained one minor exception that has been remediated.
The business units manage their vendors at an operational level, while the legal department manages vendor procurement and contracting.
- The IT department sends a list of due diligence questions to be answered by proposed vendors in order to determine vendor risk to the organization. Vendor information security requirements and privacy questions are tailored based on the identity of the vendor, nature of the service, and the type of personal information, if any, to be disclosed to and stored by the vendor.
- The testing of the vendors' systems is conducted to determine suitability and compliance with FNF security and privacy standards.
- The company has a vendor management committee who meets quarterly to discuss vendor effectiveness, protection of private information, timeliness, and other factors.
- Feedback on vendors is given by the groups that use the various vendors, although FNF does not use a vendor scorecard.
- FNF does not use any offshore vendors.
Insurance and legal proceedings
FNF 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 mortgage loan servicing is ABOVE AVERAGE.
As of June 30, 2020, FNF was the primary servicer for a portfolio totaling C$31.4 billion. This is a 37.7% increase since our last review, continuing a trend of UPB growth since 2015. Average loan size continues to increase to C$5.9 million (June 2020) from C$4.4 million (last review).
FNF's portfolio is somewhat diversified geographically, with 49.9% of UPB located in Ontario, 18.9% located in Quebec, and 11.4% in British Columbia. Although concentrated in Ontario, based on the population demographics in Canada, we believe FNF's portfolio is sufficiently diversified geographically. The portfolio, however, has limited diversity in property types, with approximately 88.2% (by UPB) of the portfolio concentrated in multifamily housing (see table 3), which is similar to other Canadian servicers we rank. Investor diversity type is also modest, with an emphasis on banks/financial institutions (65.5% of UPB) and CMBS (23.1% of UPB) (see table 4).
Delinquencies in the commercial servicing portfolio have so far been seemingly unaffected by the pandemic and are at a multi-year low of 0.06% as of June 30, 2020. Management stated that they did have some conversations with borrowers about possible delinquent payments, but those issues never materialized and payments continue to be collected on time.
|Primary Servicing Portfolio|
|June 30, 2020||Dec. 31, 2019||Dec. 31, 2018||Dec. 31, 2017||Dec. 31, 2016|
|UPB (mil. C$)||No.||UPB (mil. C$)||No.||UPB (mil. C$)||No.||UPB (mil. C$)||No.||UPB (mil. C$)||No.|
|Average loan size||5.8||--||5.4||--||4.8||--||4.3||--||3.9||--|
|Totals may not add due to rounding. UPB--Unpaid principal balance.|
New loan boarding
Based upon its stated practices and written procedures, FNF has a sound loan setup function. The funding and documentation group handles new loan setup activities. Highlights and controls of the process include the following:
- A new-loan boarding staff member reviews all loan information recorded in the Optimus system before a transaction closes, as well as updates and reconciles all remaining data fields until the funding disbursement.
- A second employee within the funding area performs an additional review of all loan data for 100% document-to-system validation.
- Reminder dates are set up in the system for property insurance, taxes, inspections, financial statements, etc.
- Loans are targeted to have essential data into the system within five days.
- The Optimus system provides system-generated exception reports, which the commercial funding administrator and manager review.
- Borrower welcome letters are system-generated and issued within five business days of loan boarding by the servicing group. FNF formally tracks loan boarding accuracy and timeliness metrics.
- No trailing documents were outstanding on loans boarded more than six month ago.
FNF has two staff members dedicated to payment processing. The company's practices and integrated technology tools efficiently address payment processing and appropriate segregation of duties. Highlights of payment processing include the following:
- Of the payments received, 99% are through pre-authorized checks or wire transfers, with only 1% received through traditional checks.
- All loan payments received are deposited and applied to the servicing system on the same day. If the loan is in a conduit pool, the monthly payments will flow through automatically to FNF's investor reporting sub-servicing system on Optimus.
- The Optimus servicing system provides a daily automated interface with the general ledger's subledger accounts for tracking investor balances and escrowed funds.
- The finance and accounting area reconciles payment postings daily, along with monthly reconciliations of investor and escrow accounts.
- There were 10 items over 90 days in aged suspense as of June 30, 2020. Best practices would dictate clearing/applying these funds as soon as possible.
- FNF has 227 adjustable-rate mortgage (ARM) loans as of June 30, 2020; however, management does not report performing any adjustable rate review audits on those loans. We would view a periodic review of ARMs as a best practice.
FNF has dedicated staff members for the various investor reporting and operational accounting activities that are properly segregated for reporting, remitting, and related account reconciliation processes. Highlights and controls of the processes include the following:
- Reporting is handled through the Optimus servicing system, with automatically generated reports to meet reporting requirements for securitized and balance sheet loans.
- The investor reporting group provides monthly remittances to the custodians of each pool.
- Investor reporting delivers monthly Commercial Real Estate Finance Council (CREFC) reports to reporting agents for each pool serviced.
- The investor reporting manager reviews and approves all electronically delivered reports before submission.
- The separate finance and accounting area reconcile the investor funds from each trust account before remittance.
- Remittances are processed primarily as electronic funds transfers, and all remittances require two levels of managerial approval before disbursement.
- There have been no CMBS remittance or reporting errors since our last review.
We believe the company has effective controls for managing escrow administration. Commercial and residential taxes are both handled by the residential tax group, whereas the commercial administration group manages insurance matters. Other escrow features include the following:
- Upon loan closing, the funding area completes a comprehensive review of tax and insurance requirements and establishes appropriate data records on the Optimus servicing system.
- The servicing system tracks tax due dates and payments, as well as insurance expiration dates and coverage limits. The system generates standard disbursement reports for tax-escrowed accounts that are matched to applicable tax bills.
- FNF uses a third-party vendor for insurance policy reviews and insurance tracking.
- Automated reminder letters are issued for non-escrowed loans (property insurance is generally not escrowed in Canada), which request evidence of payment confirmation.
- Insurance compliance is monitored by in-house staff on an annual basis. Insurance renewal letters are sent to borrowers 15 days before policy expiration. FNF secures and reviews updated insurance policies (received from borrowers or agents), and renewals are tracked in the servicing system.
- The company has a forced-placed insurance policy, which provides for a 90-day look-back period. As of June 30, 2020, there were 11 loans (0.02% of the overall portfolio by UPB) added to this forced-placed policy, thus requiring escrowed insurance payments because these borrowers were unable to secure their own insurance for the property in a timely manner.
- Release of any escrow funds must be reviewed and approved by a manager and are made through the servicing system.
Asset and portfolio administration
We believe FNF has sound procedures covering asset and portfolio administration tasks. They have separate dedicated personnel within the commercial administration group who handle portfolio reporting, documentation, financial statements, and compliance. Other notable features include the following:
- Personal Property Security Act (PPSA) registrations are managed by an outside vendor who files the resubmissions with the respective jurisdiction and has restricted access to Optimus to track the status of these resubmissions. Servicing management and staff review system reports to verify all PPSA registrations are handled timely. FNF reported nominal PPSA registrations had expired as of June 30, 2020.
- FNF has defined procedures that support property inspections, financial statement collection and analysis, servicing agreement compliance, credit reviews, and watchlist reporting.
- Loans are reviewed monthly by the SVP of commercial mortgage and asset management to determine those that may be included on the watchlist based on changes to occupancy, declines in property condition, and changes in debt service coverage ratios, among other issues.
- Property financial statements are obtained at least annually and normalized using CREFC reporting standards.
- Non-securitized loans are handled in a similar fashion to securitized loans, based on individual investor requirements. As of Dec. 31, 2019, FNF had collected 84% (versus 87% for the same period in 2018) of prior year-end operating statements for the total portfolio. As of June 30, 2020, FNF had collected just 60% (versus 75% for the same period in 2019) of prior year-end operating statements for the total portfolio, primarily due to the pandemic.
- Of all year-end property operating statements, 100% had been collected and 97% were analyzed for the CMBS portfolio as of Dec. 31, 2019. As of June 30, 2020, 83% of all CMBS prior year-end property operating statements had been collected, compared to 70% of the CMBS statements that were analyzed for the prior year.
- In-house personnel typically perform inspections for properties located near FNF's offices, but the majority of inspections are completed by a vendor for properties outside Toronto. In certain circumstances, a local individual handling properties in Toronto completes the inspections if FNF staff is unavailable. Due to COVID 19, the inspection process is currently being reviewed, as some inspection delays are occurring. Tracking of property statements and inspections is automated through the servicing system.
- Copies of the inspection reports are imaged into the servicing system.
- Deferred maintenance items are tracked in the servicing system, with deferred maintenance letters being sent to borrowers regarding required repairs.
FNF addresses borrower requests in a well-controlled manner. During 2019, FNF staff processed 14 borrower requests, including six maturity extensions, two defeasances, one assumption, and five other requests. Through June 2020, FNF processed an additional four borrower requests. Highlights include the following:
- Allocated staff handle all requests with credit-related implications (e.g., assumptions, partial releases, etc.), which are tracked in the servicing system along with any pertinent comments regarding these requests.
- FNF has an assigned designated liaison for each borrower relationship.
- Credit cases are not automated, nor are they stored in the servicing system. We would consider it a best practice to store cases in the servicing system.
- There is an established review and approval process with senior management for larger credit matters that may move to the senior portfolio manager or the originator for processing.
FNF's portfolio delinquency levels have remained low in recent years, never exceeding 50 basis points (bps). Since the pandemic, FNF has seen a slight increase in borrower inquiries regarding payments, but delinquent loan levels have actually improved to nine bps as of June 30, 2020, from 11 bps as of Dec. 31, 2019. Nonetheless, the company has reallocated staff members to handle early-stage collections. Noteworthy features include the following:
- Allocated asset administrators handle all early-stage delinquencies.
- Phone calls are made to borrowers five to fourteen days after grace periods end (depending on investors), and written collection notices are system-generated and automatically issued immediately after grace days expire.
- Middle and senior managers review system-generated, daily delinquency reports, which can be run on demand.
- Borrower comments are documented on the servicing system for reference and follow up.
Loan Administration – Master Servicing
The loan administration subranking is ABOVE AVERAGE for master servicing.
FNF serves as the master servicer, working with six subservicers that manage 161 loans totaling C$1.42 billion in UPB (in five transactions) as of June 30, 2020. The master servicing portfolio has increased 11.8% by loan count and increased 50.8% by C$UPB since our last review, as management has been more focused on new opportunities.
|Master Servicing Portfolio|
|June 30, 2020||Dec. 31, 2019||Dec. 31, 2018||Dec. 31, 2017 (i)||Dec. 31, 2016|
|UPB (mil. C$)||No.||UPB (mil. C$)||No.||UPB (mil. C$)||No.||UPB (mil. C$)||No.||UPB (mil. C$)||No.|
|Master (SBO) loans||1,422.6||161||971.9||117||892.4||141||943.1||144||898.7||123|
|Average loan size||8.8||--||8.3||--||6.3||--||6.5||--||7.3||--|
|(i)Year-end 2017 data may vary from originally published data due to additional information received. Totals may not add due to rounding. SBO--Serviced by others. UPB--Unpaid principal balance.|
New loan boarding
FNF follows the same protocols for new loan setup of subserviced loans as it does for its primary serviced loan portfolio. For loans serviced by other servicers, a majority of the setup process occurs through electronic means, including downloads from subservicers with subsequent verification of documents and data.
Subservicer accounting and reporting
FNF has demonstrated its ability in testing and refining operations when reviewing its subservicers. Highlights and controls of the process include the following:
- FNF receives and reviews subservicer reports electronically, and uploads these reports to its Optimus servicing system manually to compare with its existing data.
- Cash is wired into the FNF clearing account and reconciled with its primary servicing function as applicable.
- Remittance reports are reviewed and approved by the manager.
- The account reconciliation process is automated, and disbursement and clearing account reconciliations are handled monthly.
- There is a segregation of duties and secondary managerial oversight that provides appropriate controls over cash movements and reconciliations.
FNF monitors reserve releases on a monthly basis, as subservicers must report this activity on the loans with reserves. Any reserve releases may also be reviewed as a part of the annual servicer audit process.
- The company monitors tax reserves quarterly from their subservicers as a part of its primary servicer quarterly report.
- Tax and insurance information is not loaded at the loan level, but rather it is monitored via quarterly officer certificates and monthly subservicer reports generated by Optimus.
Asset and portfolio administration
FNF has sound processes for subservicer loan and portfolio administration. Highlights and controls of these processes include the following:
- Subservicers must submit property financial statements, inspection reports, and borrower requests that require master servicer approval.
- FNF reviews the financial statements as part of the subservicer investor reporting package.
- Staff review the inspection reports for thoroughness, as well as for indications of deferred maintenance.
- The CMBS manager oversees subservicers' credit-related reporting requirements.
- The CMBS manager and SVP of commercial mortgage review borrower requests that require master servicer approval based on information the subservicers supply.
- Typically, FNF as master servicer consults special servicers for any breach or default matters that would present high risk based on an annual review of quarterly financial statements, inspection reports, taxes, insurance, monthly reporting and remittances, and discussions with borrowers and subservicers.
- Master serviced loans are placed on the watchlist following the same criteria used for primary serviced loans.
Within its procedures, FNF outlines requirements it considers acceptable for those qualifying as a subservicer (based on systems, corporate financials, insurance, etc.) and for monthly monitoring of subservicers' reporting packages by FNF's CMBS manager. Highlights and controls of the process include the following:
- Subservicers are required to have annual audits, submit annual compliance certifications, and respond to standard questionnaires.
- Subservicer audits are conducted annually either on site or as desk reviews, depending on portfolio size or proximity to FNF's offices. These audits typically take place in the third and fourth quarter of each year and are being done remotely during the pandemic.
- The CMBS manager and pool administrator participate in the compliance review process for subservicers.
- FNF samples subservicer loan files and reviews all watchlist loans in its annual review process.
- FNF collects updates of the subservicers' corporate financial condition, insurance policies, organizational structures, and policies and procedures manuals.
Investor reporting, advancing, and special servicer interaction
FNF has standard procedures for monitoring and approving delinquent loan advancing. Highlights and controls of the process include the following:
- The assistant manager of commercial servicing recommends advances based on a determination of recoverability of up to one mortgage payment, subject to the chief financial officer's (CFO) approval.
- Monthly advances are tested against the respective loans' outstanding principal balance with appropriate controls over authorizations.
- The servicing system processes recoveries received.
- The company effectively oversees subservicers by conducting monthly calls and reviews of reporting; it monitors portfolio performance and updates on asset status plans. In the instance of loan default, the loan is transferred to the special servicer consistent with the loan documents and is updated in Optimus.
Loan Administration – Special Servicing
The loan administration subranking is ABOVE AVERAGE for special servicing.
As of June 30, 2020, FNF is special servicer on five CMBS transactions, which consists of approximately C$1.5 billion in UPB. At the same time, however, the special servicing department reported no active portfolio of loans or real estate-owned (REO) assets in special servicing (see table 8). Nonetheless, FNF has handled numerous workouts under whole-loan and mortgage-backed securities servicing agreements with pension funds, insurance companies, and government agencies since the 1990's.
FNF uses a team approach for special servicing, where loans are assigned to staff based on workloads and expertise. Complex loans and any REO assets are handled by either the SVP of commercial mortgages or the manager of commercial default management. The remaining special servicing group includes four people with loan workout experience. It uses a thorough asset analysis and controlled committee approval process for loan resolutions.
Similar to other Canadian servicers we rank, FNF has handled a modest number of specially serviced assets in recent years. As a result, it has reported minimal resolution activity and lacks REO management and disposition experience compared with servicers we rank in the U.S.
In particular, there was no resolution activity reported during the first half of 2020. In 2019, there was one loan resolved and transferred back to the master servicer (see table 9). The average resolution time periods are reported; however, with few data points, the metric's usefulness is limited.
Notwithstanding reporting no active loans in special servicing, the company experienced a surge in borrower relief requests during the COVID-19 pandemic. As a result, a team was established in mid-March to handle payment deferrals and monitor and support borrowers who requested deferrals. Over 500 calls were received, but ultimately few deferrals were required. The employees comprising the payment deferral team were available primarily as FNF's conventional business was temporarily paused during the early stages of the pandemic. As deferral requests have subsided, these individuals have since returned to their normal credit roles.
|Special Servicing Portfolio|
|June 30, 2020||Dec. 31, 2019||Dec. 31, 2018||Dec. 31, 2017||Dec. 31, 2016|
|UPB (mil. C$)||No.||Avg. age (i)||UPB (mil. C$)||No.||Avg. age (i)||UPB (mil. C$)||No.||Avg. age (i)||UPB (mil. C$)||No.||Avg. age (i)||UPB (mil. C$)||No.||Avg. age (i)|
|Real estate owned||0.0||0||N/A||0.0||0||N/A||0.0||0||N/A||0.0||0||N/A||0.0||0||N/A|
|(i)Avg. age reflects the time in months from the date the loan first became specially serviced to the reporting date. Totals may not add due to rounding. N/A--Not applicable.|
Loan recovery and foreclosure management
FNF displays effective loan recovery and foreclosure management protocols to resolve nonperforming loans, particularly of the multifamily property type. Highlights include the following:
- The portfolio manager reviews the servicing reports for monetary/non-monetary issues and monitors property financial statements for declining debt service coverage ratios or occupancy issues.
- Depending on investor requirements, transfers to the special servicing workout team may occur sooner than the 60-day servicing agreement default trigger.
- The special servicing team uses standardized templates for workout recommendations made to the committee, which includes evaluation of alternative scenarios via net present value calculation, as well as recourse provisions, as applicable.
- Management reported that most business plans are developed and approved within 30 to 60 days of transfer to special servicing.
- Updates to the approved business plan are reviewed monthly to consider the status of borrower negotiations, changes in market conditions, etc.
- The team's manager coordinates with approved outside counsel as necessary.
|Total Special Servicing Portfolio--Loan Resolutions|
|UPB (mil. C$)||No.||Avg. age(i)||UPB (mil. C$)||No.||Avg. age(i)||UPB (mil. C$)||No.||Avg. age(i)||UPB (mil. C$)||No.||Avg. age(i)||UPB (mil. C$)||No.||Avg. age(i)|
|Returned to master||0.0||0||N/A||0.3||1||24.1||0.0||0||N/A||0.0||0||N/A||0.0||0||N/A|
|DPO or note sale||0.0||0||N/A||0.0||0||N/A||0.0||0||N/A||7.7||1||12.2||0.0||0||N/A|
|(i)Average age reflects the time in months from the date the loan first became specially serviced to the reporting date. Totals may not add due to rounding. UPB--Unpaid principal balance. DPO--Discounted payoff.|
Power-of-sale/REO dispositions and accounting and reporting
In many Canadian provinces, power-of-sale provisions exist in the loan documents. This allows lenders to dispose of the property under the borrower's default without having to resort to the courts or take title to the asset.
Given FNF's operating history and the consistently low delinquency rates in the Canadian market, FNF has limited experience with such power-of-sale activity or management and disposition of an REO asset. However, the company maintains the necessary policies and procedures for the power-of-sale process to market REO assets and manage the property, and to account and report for the REO properties' income and expenses should the need arise.
REO accounting and reporting
FNF's controls and procedures for property-level accounting and oversight are adequate. Although the company has not had any REO assets for some time, the CFO would be tasked to handle the accounting and reporting for these assets. The accounting and reporting procedures would generally follow those described for primary serviced loans.
FNF handles the management and oversight of subcontractors in a controlled and effective manner, which are well documented in its policies and procedures manual. Notable highlights include the following:
- FNF uses standard engagement forms for appraisal, engineering, sales and leasing agents, property managers, and environmental services.
- FNF's senior committee approves vendors before engagement, based on the business plan that includes an estimate of third-party vendor expenses.
- The assigned portfolio manager monitors vendor performance and task timelines, as well as reviews the final product along with the vice president of mortgage services.
- The approved vendor list is available electronically, with senior management periodically updating the list.
The legal department has four attorneys who can assist staff as needed to support special servicing.
- The FNF legal department also engages with outside counsel on special servicing matters as needed.
- FNF has an approved attorney list and engagement process, but they are controlled by asset managers and the SVP.
- FNF uses their own standard attorney engagement letter when using outside counsel.
- Asset-level legal costs must be approved by the assigned asset managers. Costs are tracked within the servicing system, which monitors actual legal costs of special servicing and compares them to budgets within asset status plans.
The financial position is SUFFICIENT.
- First National Financial L.P. ABOVE AVERAGE Commercial Servicer Rankings Affirmed; Outlook Stable, Nov. 6, 2020
- Select Servicer List, Sept. 25, 2020
- Economic Research: Canada's Economy Faces A Patchy Recovery, June 29, 2020
- Canadian Mortgage Servicers Operating In Unusual Times, May 11, 2020
- COVID-19 Causes More Severe Disruption For Canada's Economy, April 17, 2020
- Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019
- Servicer Evaluation: First National Financial L.P., July 25, 2018
This report does not constitute a rating action.
|Servicer Analyst:||Marilyn D Cline, Farmers Branch + 1 (972) 367 3339;|
|Secondary Contact:||Leigh Stafford McLean, Farmers Branch + 1 (214) 765 5867;|
|Analytical Manager, Servicer Evaluations:||Robert J Radziul, New York + 1 (212) 438 1051;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.