Fitch Affirms First National's Commercial Servicer Ratings

Published: 2024-12-09 05:13:07 ET FXNC

Fitch Ratings has affirmed the commercial mortgage servicer ratings of First National Financial LP's (First National) as follows.

Commercial primary servicer rating at 'CPS2-'/Stable;

Commercial master servicer rating at 'CMS3+'/Stable;

Commercial loan level servicer rating at 'CLLSS3+'/Stable.

RATING ACTIONS

Entity / Debt

Rating

Prior

First National Financial LP

CMBS Loan Level Special Servicer

CLLSS3+

Affirmed

CLLSS3+

CMBS Master Servicer

CMS3+

Affirmed

CMS3+

CMBS Primary Servicer

CPS2-

Affirmed

CPS2-

Page

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VIEW ADDITIONAL RATING DETAILS

Key Rating Drivers

The affirmation of the primary and master servicer ratings reflect First National's demonstrated proficiency in overall servicing ability, including the tenured and experienced management teams with noted key person risk, improved management turnover, sufficient technology infrastructure, adequate servicing operations and reporting capabilities for the size and scope of the current portfolio which is heavily weighted toward multifamily assets.

The ratings also consider the company's internal governance infrastructure, history of internal and external audits. The master servicer rating also considers potential advancing obligations for securitized transactions under stressed scenarios, which are mitigated by available liquidity and an investment-grade rated backup advancing agent.

The affirmation of the special servicer rating reflects First National's history of demonstrated proficiency resolving commercial mortgage loans of varying property types and locales, its experienced and stable asset management team, and the nature of the Canadian commercial mortgage market with a limited number of defaults and borrower recourse. The rating also considers the special servicing group's access to the broader First National platform, the limited use of technology for defaulted loan administration, and the team's relatively concentrated size given seven team members. All three ratings reflect the financial condition of First National's parent.

First National is a wholly owned subsidiary of FNFC, a publicly traded company founded in 1988 and headquartered in Toronto. The directors, executive officers and senior management of First National own, directly or indirectly, approximately 80% of the outstanding common shares. First National is the largest Canadian nonbank lender participating in Canada's residential and commercial mortgage broker network.

First National funds the majority of mortgages it originates through institutional and fund capital, and a range of securitization alternatives; however, the company does originate a limited number of loans for its balance sheet. As of June 30, 2024, residential mortgages represented 95% of total loans serviced by count.

The commercial servicing group comprises 36 full-time employees, up from 34 and 33 at Fitch's previous two reviews. First National continues to successfully recruit and add staff to mitigate turnover and support portfolio growth with eight new hires over the past 12 months, averaging three years of CRE experience. Overall turnover in primary and master servicing decreased to 20% during the 12 months ending June 30, 2024, down from 21% and 37% noted during 2023 and 2022, respectively. Excluding internal transfers, overall turnover would be 11%, which Fitch notes to be consistent with historical levels.

The special servicing group consists of seven dedicated employees, up from six, with five asset managers who average 19 years of industry experience and 12 years of company tenure. There were no departures in the special servicing function, down from 18% turnover the previous review. Additionally, there has been no asset manager turnover during Fitch's last four reviews, which Fitch believes to be indicative of a strong asset management team.

Due to the elevated amount of actively specially serviced assets in the portfolio compared to previous years, the asset management group currently maintains one AM for every 16 specially serviced assets, up from seven; however, Fitch notes that there are additional resources should transfers continue to increase.

Average training hours per primary, master and special servicing employee have remained stable at 12, 12 and 9, respectively, which Fitch notes to be materially down from previous years and low compared to other Fitch rated servicers.

Internal controls and governance consist of multiple levels of review. Management makes use of monthly reporting from the servicing system and Power BI to monitor workloads and loan performance metrics. First National has a dedicated internal audit group reporting to the board of directors' audit committee, performing annual audits of the servicing group. Year-over-year, the internal audit group completed three audits with a primary focus on helpdesk interactions, investor relations, and commercial loans enforcement functions, all of which had no material findings. The servicing group's dedicated quality assurance team continues to build and implement sampling and testing policies, successfully completing several reviews of key servicing processes, resulting in no material findings.

First National is also subject to a Service Organization Control 1 (SOC 1) audit that tests technology controls, the most recent in 2023, resulted in a qualified opinion given three deviations, all of which involved lapses in user account management and information systems access regulation. First National has remedied the identified issues and retroactively reviewed the relevant functions to strengthen controls and confirm findings will l not reoccur in subsequent years.

First National uses Marlborough Sterling's OPTIMUS servicing system for commercial and residential servicing. Fitch noted some limitations of the system when compared to other systems used by Fitch-rated servicers; however, the application is appropriate considering the size and complexity of the servicing portfolio.

First National also uses Microsoft's Power BI tool to monitor servicing requirements, which incorporates data refreshed daily, and Microsoft Dynamic's customer relationship management (CRM) system is used to track borrower requests and modifications. Recent technology advancements include the continued development of the servicing workflow application, including updates to enhance performance year-over-year. The tool focuses on annual financial statement collection and reporting, loan payoff requests and insurance compliance management functions, tracking tasks and allowing managers to see timelines for staffing and quality control purposes. Additionally, First National plans to migrate its core servicing system to Microsoft Azure within 12 months.

As of June 30, 2024, First National was the named master and primary servicer for 14 securitized loans totaling CAD100.4 million, and the named primary servicer (reporting to an external master) for 23 securitized loans totaling CAD142.9 million. As of the same date, the company was primary servicing 5,770 non-securitized loans totaling CAD52.3 billion, which had grown 27% by balance and 4% by loan count since 2022, reflecting First National's focus toward larger balance loans.

As of the same date, First National was named special servicer for 125 securitized loans totaling CAD905.5 million for five transactions, with no securitized loans in active special servicing. First National's non-securitized portfolio represents loans where the company is engaged to perform special servicing functions for third parties, which represents the majority of loans in their portfolio, totaling 5,770 loans with a balance of CAD52.3 billion. Additionally, First National had 81 non-securitized loans totaling CAD671.1 million in active special servicing.

Additional information is available on www.fitchratings.com