Residential mortgage servicers are dealing with a steep rise in delinquent loans, while servicers on the commercial side are witnessing an uptick in transfers of nonperforming assets to special servicing, according to a recent summary published by Standard & Poor’s Ratings Services. “With the dramatic increase in loan delinquencies come staffing and capacity issues, portfolio risk related to adjustable-rate mortgage resets, and the accompanying pressure to find effective loss mitigation strategies, including loan modifications,” said residential servicer analyst Richard Koch, a director in Standard & Poor’s servicer evaluations group. “In addition, the spike in foreclosures and real estate owned assets, in our opinion, has stretched the limited number of vendors that service the industry to capacity — and as more loans move through foreclosure into the REO category, the need to make loan advances has placed yet another financial strain on servicers.” The proliferation of risky mortgage products such as option ARMs has done more than fuel the rise in delinquencies — it has also exposed servicers to greater portfolio risk. “For both the subprime and Alternative-A loan segments, ARM resets will peak this year and drop off significantly in 2009 and 2010,” he contended. Data, however, suggests that the option ARM problem is likely to rise to prominence in mid 2009 and run through 2010; and, of course, subprime ARM borrowers that can’t refinance into a fixed-rate product remain exposed to further re-adjustments of their loans going forward. Regardless, one of the most pressing tasks for residential servicers has been the need to quickly increase staffing and capacity, especially in the default administration area. “Although the need to add new collection representatives has abated somewhat, servicers are still significantly expanding staff in areas such as loss mitigation and REO asset disposition,” Koch said. HousingWire can attest for growth in the REO space; a recent REO-centric conference in Dallas, the Five Star, drew more than 4,000 attendees this year. CRE may be next up Meanwhile, delinquencies are also on the rise among commercial servicers, although they still remain low from a historical perspective, S&P said. Commercial special servicers rated by S&P reported substantially more asset transfers to special servicing, however, and higher volumes of REO assets during the first half of 2008 than in the prior six months. “Based on what some special servicers are saying about third-quarter volumes, the number of loans entering special servicing appears to be on pace to increase substantially, and perhaps even double, in the second half of 2008 compared with the first,” said commercial servicer analyst Michael Merriam, a director in Standard & Poor’s servicer valuations group. Some special servicers are reporting that loan maturities are becoming a more common–if not yet overwhelming–reason for transfers to special servicing. In other words, it’s getting pretty difficult to roll over some CRE debt. “In the tighter credit environment, we expect to see special servicers’ total inventories of unresolved loans increase and their timeframes for resolving nonperforming assets to lengthen as we move through the fourth quarter and into 2009,” Merriam said. There is a connection between what many expect to be a bust in commercial real estate and woes in residential housing; S&P said that some special servicers have noted concerns that the extremely high volume of residential foreclosures already in, or about to enter, the court system. The concern is that the high volume may impede their own efforts to complete legal actions involving commercial real estate. For more information, visit http://www.standardandpoors.com. Write to Paul Jackson at paul.jackson@housingwire.com.

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