Servicers of commercial mortgage-backed securities (CMBS) collect mortgage payments, remit distributions to investors and facilitate interactions among borrowers, lenders, investors and rating agencies. Just as certain hedge funds have acquired residential mortgage servicers, see “Hedge Funds are Purchasing or Launching Mortgage Servicers to Take Advantage of Increased Opportunities in Distressed Residential Mortgages
,” Hedge Fund Law Report, Vol. 2, No. 35 (Sep. 2, 2009), some hedge funds are evaluating the purchase of CMBS servicers, but for different reasons. In the residential context, a primary reason for a hedge fund manager to own a servicer is the ability to modify residential mortgages owned by its hedge funds. In the commercial context, by contrast, the primary reasons for owning a servicer include a steady, likely growing (in the short and medium term) and uncorrelated revenue stream and advantageous access to defaulted loans in the CMBS serviced by the owned servicer. However, modification of loans in a CMBS by a servicer is significantly more difficult (for various regulatory and practical reasons, explained more fully below) than modification of whole residential loans by a residential servicer. In other words, the purchase of a CMBS servicer is more of an investment in itself, as opposed to an adjunct to a separate investment. This article defines CMBS and describes the securitization process; defines the master servicer and the special servicer and the different roles played by each; the rights and obligations of CMBS servicers; pooling and servicing agreements; Real Estate Mortgage Investment Conduit rules; the legal and contractual standards to which CMBS servicers are held; commercial real estate market dynamics; the benefits to hedge funds of owning CMBS servicers; the concerns raised by CMBS servicer ownership; the reasons why the interests of holders of junior and senior tranches of CMBS bonds often diverge, and how servicers can perform in light of such divergent interests.