Servicers' Litigation Practices Draw Scrutiny
Bergquist, Erick, American Banker
An old debate in the commercial mortgage industry concerns whether firms that administer loans gone bad in securitized pools have a conflict of interest when they also hold part of the bonds.
Critics of the practice contend that by having a financial position, the administrator or special servicer may be tempted to use its knowledge of the underlying loans to maximize its profit at the expense of other investors.
The matter came to the forefront Monday, when Fitch Inc. put Orix Capital Markets LLC in Dallas, which services distressed commercial mortgages, on review for a possible downgrade.
Stephanie Petosa, a Fitch analyst, questioned Orix's "aggressive litigation" practices, which she said "could yield superior returns" but could also represent higher risk to investors.
Moody's Investors Service Inc. has also studied the issue, and Standard & Poor's Corp. analysts said in interviews Wednesday that they are reviewing the litigation practices of servicers, including Orix.
According to critics, Orix is needlessly putting others at risk by suing the investment banking firms that issued the bonds, and it is dipping into the trust that pays principal and interest to all bondholders.
Some analysts said it was within its rights to bring a number of recent cases. In the past few years it has sued Lehman Brothers for failing to provide files on loans Orix was supposed to service, and UBS AG for not providing title records.
Orix argues that because servicers buy subordinated pieces of securitizations, and are the first to lose if borrowers default, it is in their best interest -- and the interest of other investors -- to litigate to recover losses. It says that if it does not sue, the losses could wipe out all subordinated positions and even hit senior ones.
In a pending case, Orix is trying to recover losses from a $50 million mortgage that Nomura Holdings Inc.'s lending unit made on a medical office building in 1997.
The situation actually involves two lawsuits. One, pending since 2000, when it was filed by the trustee, now known as LaSalle Bank N.A., is an attempt to get Nomura to repurchase the office loan. Orix took over that suit this year, when it appointed itself as the special servicer of the assets. …