* Lawsky eyes probe of commercial real estate loan servicers
* Focus on business conflicts and impact on bondholders
* Auction sites expected to fall under heavy scrutiny
By Joy Wiltermuth
NEW YORK, July 1 (IFR) - New York state bank regulators are
preparing an investigation into commercial real estate mortgage
loan servicers whose related businesses may be in conflict with
the bondholders that the loan companies are supposed to protect.
Benjamin Lawsky, the superintendent of New York's Department
of Financial Services, will be leading the initial
investigation, a source with knowledge of the matter told IFR.
"He is looking at these firms to identify if subsidiaries
they have developed are profiting from loans they are
servicing," the source said.
The top three servicers of defaulted CMBS loans, by far the
most profitable part of the servicing sector, are CWCapital
Asset Management, C-III Asset Management and LNR Partners.
Together they held almost 80% of the market for servicing
defaulted CMBS loans at the end of 2013, according to Fitch
But they also all have investment arms that target the same
types of problem loans and distressed properties that the
servicers handle - lines of business that are expected to be at
the heart of the probe.
Fortress Investment Group, for example, bought CWCapital,
which manages the 110-building Peter Cooper Village Stuyvesant
Town mega-complex in New York City.
CW gets paid to oversee the property's US$3bn defaulted CMBS
loan as a servicer, but also controls the process that will
determine what the property sells for - and Fortress is planning
to bid on the property for the lowest possible price it can get.
"If they are servicing an asset for a third party and have
to sell a note, or are taking back property, what steps are they
taking to prove they got market bids?" one observer said.
"That seems to me what are going to check."
Lawsky's office declined to comment on the CMBS probe or
provide any details on when it might be formally launched.
People briefed on the situation at all three companies told
IFR they had not yet received letters from Lawsky's office. The
source, though, said they would be on the way within weeks.
It's unclear what fines might be doled out - or if any
suspected activity is illegal - but punishments in a similar
investigation of the residential servicing space have been
hefty, and the big CMBS players are on high alert.
Ocwen Financial Corp, the nation's largest non-bank
residential mortgage servicer, has come under regulatory fire.
It was penalized US$2.1bn last year by the Consumer
Financial Protection Bureau (CFPB) and 49 states over charges
that it improperly foreclosed on borrowers, and had to
compensate people who lost their homes to foreclosure between
2009 and 2012. It also promised principal reductions in a
three-year period to others.
Lawsky's investigation into the RMBS sector, unlike that of
the CFPB, is focused just on the size and scope of the related
servicing businesses at Ocwen and rival servicer Nationstar -
honing in on whether the two firms have grown too big to handle
the volume of loans they service, and if they overcharge
investors and borrowers to auction off foreclosed properties.
Some are worried that CMBS servicers could be blocked from
pursuing some of their ancillary businesses, just as Lawsky's
RMBS probe put at least a temporary halt to their explosive
growth in the residential mortgage servicing arena - growth only
made possible as new regulation forced banks out of the sector.
HEAT ON AUCTIONS
Scrutiny of CMBS auction arms - including LNR's stake in
Auction.com - is therefore likely to be particularly intense.
In his probe of Ocwen, Lawsky has been concerned about
whether its online real estate auction house Hubza was charging
higher fees when the costs could be passed off to RMBS
When Ocwen used the site to host a foreclosure or short
sale, Hubza charged a 4.5% fee - a rate that dipped as low as
1.5% when it competed for business from third-party sellers.
It's still not clear what changes could be in store at
Hubza, but bidders on Auction.com told IFR they expect similar
questions to be asked about fees charged on the site and the way
the bidding process works.
The mechanism is very opaque, and critics say that there
should be more disclosure on the process for bidding on assets,
minimum sale prices and fees charged across the board to buyers
So far, though, CMBS bondholders have struggled to mount any
lawsuits to force servicers to be more transparent about their
activities - simply because they are not obliged to do so.
And servicers hope that will not change.
"What's transpired in CMBS is different with sophisticated
parties," one servicer said.
"A lot of the issues with RMBS - clearly some of the abuses
- warrant a level of scrutiny because it involves consumers."
(Reporting by Joy Wiltermuth; Editing by Natalie Harrison and