Definition
Loan Servicing: The ongoing administration of your mortgage after closing, including payment collection, escrow management, property inspections, borrower reporting, and enforcement of loan covenants.
Closing day isn't the finish line—it's the starting point of a 7-10 year relationship with your loan servicer. They'll collect your payments, inspect your property, analyze your financials, and enforce your loan terms. The relationship can be smooth and administrative, or it can become adversarial and costly. The difference often comes down to understanding what they need and delivering it before they ask.
Understanding the Servicing Structure
The Three Tiers of Servicing
| Role | Who | Responsibilities | When You Interact |
|---|---|---|---|
| Primary Servicer | Your originating lender | Payment collection, escrows, inspections, reporting, routine requests | Monthly payments, annual reviews, consent requests |
| Master Servicer | Freddie Mac or delegated party | Oversight of primary servicer, complex decisions, policy guidance | Escalated issues, modifications, complex consents |
| Special Servicer | Specialized workout firm | Default management, workouts, foreclosure | Only if loan becomes seriously delinquent |
For performing loans, you'll interact almost exclusively with your primary servicer. Keep that relationship healthy.
Annual Compliance Requirements
1. Annual Financial Reporting
Within 90-120 days after your fiscal year end, you must submit:
- Operating statements: Full-year income and expense detail
- Rent roll: Current occupancy, unit mix, rental rates
- Bank statements: Verification of operating account activity
- Borrower certification: Signed attestation that information is accurate
Key Point
The annual financial package isn't optional. Failure to submit—or submitting incomplete/inaccurate information—is a covenant violation. Set calendar reminders 60 days before the deadline.
2. Annual Property Inspection (AIF)
The servicer (or their inspector) visits annually to verify:
- Physical condition: Deferred maintenance, safety issues, code violations
- Occupancy: Actual occupancy vs. reported
- Management: Is the property being professionally maintained?
- Insurance: Evidence of current coverage posted
Inspection Best Practices
- Be present: Accompany the inspector or have your manager do so
- Pre-inspect yourself: Walk the property a week before and address visible issues
- Prepare documentation: Have rent roll, insurance certificates, management agreement ready
- Common areas matter: Landscaping, parking lots, hallways create impressions
- Sample units: Inspectors typically view 10-20% of units—have some ready
Warning
A poor inspection triggers follow-up actions: repair requirements, increased inspections, reserve increases, or covenant violation notices. First impressions matter.
3. Insurance Renewal
Your insurance must remain compliant with Freddie Mac requirements:
- Certificate due 30 days before expiration: Don't wait until the last minute
- Named insured must be exact: Borrowing entity name as it appears in loan docs
- Coverage amounts must meet minimums: Property value, rental income, liability
- Mortgagee clause required: Lender must be listed as loss payee
Lapses in insurance can trigger force-placed coverage at 3-5x the cost—with premiums added to your loan balance.
Escrow Account Management
What's Typically Escrowed
| Item | Monthly Collection | Disbursement Timing |
|---|---|---|
| Property Taxes | 1/12 of annual taxes | When tax bills are due |
| Insurance Premiums | 1/12 of annual premiums | When renewal is due |
| Replacement Reserves | $250/unit/year ÷ 12 | Upon approved capital request |
| Repair Escrows | Per loan docs | Upon completion verification |
Annual Escrow Analysis
The servicer analyzes escrow accounts annually to compare:
- Projected costs: What they expected to pay
- Actual costs: What was actually disbursed
- Upcoming costs: Next year's projected expenses
The analysis results in one of three outcomes:
| Outcome | What Happens | Your Action |
|---|---|---|
| Shortfall | Monthly payment increases, plus possible lump sum | Budget for higher payment or pay lump sum |
| Surplus | Refund or credit if over threshold | Decide whether to apply to payment or receive refund |
| On target | No change | None required |
Key Point
Property tax increases are the most common cause of escrow shortfalls. Monitor your tax assessments—if your property is reassessed higher, expect your escrow payment to increase at the next analysis.
Replacement Reserve Disbursements
Freddie Mac requires $250/unit/year in replacement reserves. To access these funds:
Eligible Uses
- Roof replacement or major repair
- HVAC system replacement
- Parking lot resurfacing
- Appliance replacement (bulk)
- Common area renovations
- Unit interior upgrades (bulk)
Disbursement Process
- Submit request: Written request with contractor bids, scope of work, timeline
- Servicer approval: Review for eligibility and reasonableness (5-15 business days)
- Complete work: May require progress inspections for large projects
- Submit evidence: Paid invoices, lien waivers, completion photos
- Receive disbursement: Funds released after verification (5-10 business days)
Warning
Replacement reserves are not your money—they're escrowed funds with specific eligible uses. You cannot use them for operating expenses, debt service, or ineligible capital items. Misuse is a covenant violation.
Loan Modification and Forbearance
When to Contact Your Servicer
Reach out immediately if you anticipate:
- Difficulty making payments
- Significant occupancy decline
- Major unexpected expenses
- Market deterioration affecting rents
- Partnership disputes affecting operations
Proactive communication dramatically improves outcomes. Servicers have more flexibility to help borrowers who reach out early than those who simply stop paying.
Types of Workout Options
| Option | What It Does | When It's Available |
|---|---|---|
| Forbearance | Temporarily reduces or suspends payments | Short-term hardship with clear recovery path |
| Modification | Permanently changes loan terms (rate, amortization) | Long-term issues requiring restructure |
| Extension | Extends maturity date | Borrower needs more time before refinance/sale |
| Partial Release | Releases portion of collateral for sale | Portfolio sales, casualty situations |
What Servicers Evaluate
- Cause of distress: Is it temporary or structural?
- Borrower response: What actions have you taken?
- Financial capacity: Do you have resources to contribute?
- Property value: Is modification better than foreclosure?
- Market conditions: Is recovery realistic?
Common Servicer Complaints (and How to Avoid Them)
| Complaint | Prevention |
|---|---|
| Late financial reporting | Set calendar reminders 60 days before deadline |
| Incomplete insurance certificates | Use the servicer's required certificate template |
| Property condition issues | Pre-inspect before annual inspection, address visible issues |
| Unauthorized actions | Review loan docs before any trigger event |
| Unresponsive to requests | Designate a single point of contact, respond within 48 hours |
| Escrow shortfall disputes | Monitor tax assessments, budget for increases |
Building a Positive Servicer Relationship
Do
- Overcommunicate: Inform them of significant events proactively
- Submit early: Don't wait until deadlines
- Be organized: Complete submissions, proper formats, professional presentation
- Respond quickly: Address questions within 48 hours
- Know your contacts: Build relationships with your account team
Don't
- Surprise them: Bad news delivered late is worse than bad news delivered early
- Argue policy: They don't make the rules, they enforce them
- Miss deadlines: Even once damages credibility
- Ignore requests: Non-response is seen as non-cooperation
- Go over their head: Escalation should be last resort, not first move
Key Point
Servicers have discretion on many matters—inspection follow-up timing, reserve disbursement speed, consent processing priority. Borrowers with good relationships get more benefit of the doubt than adversarial ones.
Insider Terminology
Annual Inspection Form (AIF)
Freddie Mac's standardized property inspection report completed by servicers annually. Documents physical condition, occupancy, and compliance.
Escrow Analysis
Annual servicer review of escrow account comparing projected vs. actual disbursements. Results in payment adjustments for shortfalls or refunds for surpluses.
Replacement Reserves
Escrowed funds ($250/unit/year) for capital expenditures. Borrower must request disbursement for eligible uses with documentation.
Special Servicer
Third-party servicer that takes over loan administration when loans become seriously delinquent. Handles workouts, modifications, and foreclosures.
Force-Placed Insurance
Insurance purchased by the servicer when borrower's coverage lapses. Typically costs 3-5x market rate and is added to loan balance.
Key Takeaways
Bottom Line
- Servicing isn't passive: You have active compliance obligations throughout the loan term
- Annual requirements are non-negotiable: Financial reporting, inspections, insurance renewals
- Escrows require monitoring: Shortfalls increase your payment; track tax assessments
- Communicate proactively: Problems disclosed early have more solutions than problems discovered late
- Relationships matter: Good borrowers get more flexibility than adversarial ones