Pooling and Servicing Agreements Explained
What is a Pooling and Servicing Agreement?
A Pooling and Servicing Agreement. or PSA, is a legal document that contains all of the rights and responsibilities of a servicer, a trustee, and any others presiding over a pool of mortgage loans. PSAs can be standalone documents or they can be an addition to another document known as a prospectus.
If the pool of loans is publicly securitized, the PSA or prospectus documents are required to be filed with the Securities and Exchange Commission (SEC). In this case, the documents are readily available to the public through the SEC main website — though locating a specific Pooling and Servicing Agreement on the SEC website is often a difficult process. The least amount of information that is necessary to locate any specific PSA is the name of the original lender for a mortgage within the pool — and the title of the pool of loans.
Why Are Pooling and Servicing Agreements Necessary?
Pooling and servicing agreements are a necessary part of the securitization of commercial real estate loans. In general, after an investor signs a mortgage agreement and a promissory note, the loan is often pooled with other loans of similar characteristics — sometimes held in a trust — and sold on the secondary market. Mortgage investors like Fannie Mae or Freddie Mac who purchase loans on the secondary market have the option of keeping a loan in their portfolio, selling it, or packaging it as a mortgage-backed security with other loans — which can then be sold to other investors.
The PSA is crucial throughout the process, as it details the relationship between the different parties throughout the securitization process and dictates what can or cannot be done with the trust.
What Exactly Do PSAs Cover?
Pooling and service agreements are meant to outline rules and obligations for all parties involved with a pool of mortgages. Most PSAs will detail:
- detailed instructions for how the trust is to be created
- process for how bundled mortgage loans can be transferred into the trust
- how securities are issued
- rights, responsibilities, and obligations of each entity involved in the trust
What is a pooling and servicing agreement?
A Pooling and Servicing Agreement (PSA) is a legal document that contains all of the rights and responsibilities of a servicer, a trustee, and any others presiding over a pool of mortgage loans. PSAs can be standalone documents or they can be an addition to another document known as a prospectus. If the pool of loans is publicly securitized, the PSA or prospectus documents are required to be filed with the Securities and Exchange Commission (SEC).
Pooling and servicing agreements are meant to outline rules and obligations for all parties involved with a pool of mortgages. Most PSAs will detail:
- detailed instructions for how the trust is to be created
- process for how bundled mortgage loans can be transferred into the trust
- how securities are issued
- rights, responsibilities, and obligations of each entity involved in the trust
To get more granular, a PSA might describe the compensation a servicer is allowed to take. In many cases, servicers are entitled to retain most fees that it collects, from late charges to assumption and nonsufficient funds (NSF) fees. PSAs also dutifully describe the responsibilities of the loan servicer regarding payment collection, how to handle loss mitigation — some PSAs grant the authority to modify loans, for example — and the foreclosure process.
What are the benefits of a pooling and servicing agreement?
Pooling and servicing agreements provide a number of benefits for CMBS loan borrowers. These agreements provide a framework for the loan servicer to collect payments, handle loss mitigation, and manage the foreclosure process. Additionally, the PSA outlines the rights, responsibilities, and obligations of each entity involved in the trust, as well as the compensation the servicer is allowed to take. This helps to ensure that all parties involved in the trust are held accountable and that the trust is managed properly.
What are the risks associated with a pooling and servicing agreement?
Pooling and servicing agreements are meant to outline rules and obligations for all parties involved with a pool of mortgages. However, there are some risks associated with PSAs. For example, restrictive pooling and servicing agreements often prevent lenders and servicers from making changes to the structure of a loan, even if it would be in the best interests of a both the borrower and the investors. Additionally, PSAs can be complex and lengthy, sometimes more than 500 pages, which can lead to confusion among borrowers.
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How does a pooling and servicing agreement work?
A Pooling and Servicing Agreement (PSA) is a legal document that outlines the rights and responsibilities of a servicer, a trustee, and any other parties involved in a pool of mortgage loans. The PSA will detail instructions for how the trust is to be created, how bundled mortgage loans can be transferred into the trust, how securities are issued, and the rights, responsibilities, and obligations of each entity involved in the trust. It will also describe the compensation a servicer is allowed to take, payment collection, loss mitigation, and the foreclosure process.
If the pool of loans is publicly securitized, the PSA or prospectus documents are required to be filed with the Securities and Exchange Commission (SEC). The least amount of information that is necessary to locate any specific PSA is the name of the original lender for a mortgage within the pool and the title of the pool of loans.
What are the key components of a pooling and servicing agreement?
The key components of a Pooling and Servicing Agreement (PSA) include:
- Detailed instructions for how the trust is to be created
- Process for how bundled mortgage loans can be transferred into the trust
- How securities are issued
- Rights, responsibilities, and obligations of each entity involved in the trust
- Compensation a servicer is allowed to take
- Responsibilities of the loan servicer regarding payment collection
- How to handle loss mitigation
- Foreclosure process
For more information, please see this article.
To get more granular, a PSA might describe the compensation a servicer is allowed to take. In many cases, servicers are entitled to retain most fees that it collects, from late charges to assumption and nonsufficient funds (NSF) fees.
PSAs also dutifully describe the responsibilities of the loan servicer regarding payment collection, how to handle loss mitigation — some PSAs grant the authority to modify loans, for example — and the foreclosure process.