Founded in 2009 as a 50/50 joint venture with Leucadia National Corporation, Berkadia is a third-party commercial mortgage servicer, as well as an approved lender for Fannie Mae, Freddie Mac, and HUD/FHA. The company was among the top Freddie Mac and Fannie Mae multifamily lenders for 2013.
Berkadia owes its origins to GMAC Commercial Mortgage Corporation, which was acquired in 2009 by Kohlberg Kravis Roberts & Co., Five Mile Capital Partners LLC, and Goldman Sachs Capital Partners. Christened Capmark Financial, the company had $10 billion of originations in 2008 and a servicing portfolio of more than $360 billion before running into bankruptcy in October 2009.
In a deal approved by the bankruptcy court, Capmark sold its mortgage loan and servicing to the newly formed Berkadia in a deal worth $515 million.
The deal brought Berkshire into the heart of the commercial loan serving business, and the company has one of the largest commercial real estate servicing portfolios.
The Joys of Loan Servicing
So, what is commercial loan servicing and why is it so valuable?
Commercial loan servicers handle the administration of a loan from its origination until the time it is paid off. In this role the servicer collects and disperses mortgage payments, insurance premiums and property taxes. While the mortgage payments are disbursed to the mortgager, the insurance premiums and property taxes are held in escrow until payment is due.
In the case of loan servicing, the role is strictly fiduciary and does not place risk of loss on the servicer. Disbursement are governed by the calendar rather than by the vagaries of an insurance company’s rising and falling claims.
According to Morningstar Credit Ratings, in the case of Berkadia, as of June 30, 2013, the total primary and master serviced portfolio stood at $253.4 billion. In short, the size of the market is enormous, and the fees, collected month by month on mortgages are regular as clockwork.
Future Berkshire growth in debt servicing can come not only from increases in portfolio size, but from possible acquisition of additional percentages of ownership in Berkadia. For example, Berkshire’s ownership in GEICO was incremental and the company did not achieve 100% ownership until 1996.
Berkadia offers Berkshire shareholders another opportunity for growth with Leucadia doing much of the heavy lifting.
© 2014 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.