OVERVIEW
- Midland Loan Services is a division of PNC Bank N.A. and a leading provider of loan servicing, asset management, and technology solutions for the commercial real estate finance industry.
- We raised our overall rankings to STRONG from ABOVE AVERAGE on Midland Loan Services (Midland) as a commercial mortgage loan primary, master and special servicer.
- The ranking upgrades are largely attributable to improved audit results across the enterprise since our last review, accompanied with continued investments in technology enhancements and human capital.
- The ranking outlook is stable for each ranking.
NEW YORK (S&P Global Ratings) September 5, 2023—S&P Global Ratings today raised our overall rankings to STRONG from ABOVE AVERAGE on Midland Loan Services as a commercial mortgage loan primary, master and special servicer. The ranking outlook is stable for each ranking
Our rankings reflect Midland's:
- Seasoned and experienced senior and middle management;
- Strong technology platform, including its Enterprise! servicing system, which is widely used across the industry;
- Detailed policies and procedures, which are reviewed or updated at least annually;
- Comprehensive quality control and audit environment;
- Industry leadership in primary, master, and special servicing, buttressed by a lengthy operating history and track record;
- Diverse property types in its primary and master servicing portfolio, accompanied by strong geographic and investor diversity; and
- Substantial institutional commitment to the servicing platform and the CMBS business, accompanied by financial backing and shared resources provided by The PNC Financial Services Group Inc. (PNC).
Since our prior review (see "Servicer Evaluation: Midland Loan Services," published July 13, 2022), the following changes and/or developments have occurred:
- In mid-2022, the external special servicer liaison team, which manages Midland's interactions as a master servicer with external special servicers and was formerly a part of servicing operations, moved to the Real Estate Solutions (RES) group.
- A long-tenured senior manager joined the business development team to focus on special servicing (and Alt ABS business) after spending 15 years within the special servicing group in a variety of functions.
- All policies and procedures documents and guides were updated by the Risk Compliance and Quality Assurance (RCQA) group and homogenized to improve transparency.
- Continued development of the Advanced Investor Reporting (AIR) platform to reduce risk and enhance operational efficiencies.
- Enhanced automation processes within RES, including the use of optical character recognition for property financial statement data extraction and entry and rent roll data extraction.
- In the third quarter of 2022, Midland deployed a new borrower portal with improvements in functionality and servicer contact options and subsequently decommissioned its old borrower portal.
- Enhanced procedures requiring special servicing business plans ("ASRs") be updated within 12 months of the prior approved ASR.
- Transitioned to the Midland Learning and Development iLearn plan in August 2022 from its previous curriculum. iLearn and Midland-specific learning is now the primary vehicle for learning offerings and reporting across the business.
- In conjunction with the above, training "completions" are tracked (as opposed to "hours") and employee targets have been shifted to 70 completions annually compared with 30 hours previously.
- Primary and master servicing turnover totaled only 6.0% during the first half of 2023 and 15.3% during the full year 2022, improvements compared with the 19.5% experienced during 2021.
- Conversely, Midland reported elevated special servicing turnover, which totaled 38.1% during 2022, which was followed by a 22.2% six-month turnover rate during the first half of 2023, resulting in a 25.6% staffing decline in this area. At the same time, the active portfolio asset count declined 38.5%, albeit only 10.4% by unpaid principal balance (UPB).
- Midland's primary/master serviced portfolio UPB declined by 4.8%. Increases in commercial mortgage-backed securities (CMBS) (8.1%), Freddie Mac CME (7.7%) and financial institution investor clients (86.9%) were more than offset by drops in life insurance (-61.4%) and third-party investor (-13.0%) UPB as of June 30, 2023, compared with year-end 2021.
- Midland's aggregate volume of named special servicing appointments (CMBS, CME, SFR, CRE-CLO) transactions decreased to $122.6 billion of UPB, from $152.7 billion of UPB as of year-end 2021 as a $53 billion decline in CMBS appointments was only partially offset by a $25 billion gain in SFR assignments.
The overall ranking upgrades are largely driven by Midland's improved audit results across the enterprise, accompanied with continued investments in technology enhancements and human capital while maintaining management stability. In particular, the servicer's 2022 Regulation AB (Reg AB) certification contained no material instances of noncompliance, similar to the prior two years, and the various operational audits conducted across the platform all received the highest of its internal ratings. Further, the 2022 Service Organization Controls report (i.e., SOC-1) received a clean opinion.
While Midland's portfolio growth has been sluggish in recent years, particularly in primary servicing, it remains an industry leader in each of primary, master, and special servicing. Further, despite a decline of more than $30 billion in special servicing appointments since our last review, Midland remains amongst the largest named special servicers of securitized loans with a named portfolio that exceeded $122 billion as of June 30, 2023.
The ranking outlooks are stable for each ranking. As commercial real estate market conditions face the headwinds associated with heightened interest rates and challenging lending conditions, servicers are likely to face increased workloads. To that end, Midland has fortified its staffing since our last review, increasing FTEs in primary/master servicing at a rate of 11.3%, despite a 13.5% decline in loan count. While staffing within special servicing declined 25.6% during the same period, its special servicing asset-to-asset manager ratio dropped to 11.0 compared with a relatively high level above 13.6 as of our last review. As a result, we believe that Midland's staffing levels are adequate across the platform.
The financial position is SUFFICIENT.
Related research
- Select Servicer List , July 18, 2023
- Outlooks On Four Large U.S. Banks Revised To Stable From Positive On Uncertain Operating Conditions; Ratings Affirmed, March 31, 2023
- Servicer Evaluation: Midland Loan Services, July 13, 2022
- Servicer Category Descriptions Expanded and Revised, Feb. 28, 2022
- Servicer Evaluation Spotlight Report™: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
- Analytical Approach: Global Servicer Evaluations Rankings , Jan. 7, 2019
*This release does not constitute a rating action.
| Servicer Analyst: | Steven Altman, New York + 1 (212) 438 5042; steven.altman@spglobal.com |
| Secondary Contact: | Benjamin Griffis, Englewood + 1 (303) 721 4672; benjamin.griffis@spglobal.com |
| Analytical Manager, Servicer Evaluations: | Robert J Radziul, New York + 1 (212) 438 1051; robert.radziul@spglobal.com |
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