Commercial Loan Mod Consulting Opportunity Webinar

Commercial Loan Mod Consulting Opportunity Webinar: Tuesday, 12/22/09 9:00 AM PST register here http://www.commercialmodificationleads.com/

This is the first  webinar offered by CommercialModification.com to present information to potential branch affiliates.  Register to receive an invitation for this or future webinars.

CMBS Market Thaws As Defaults Increase

Government intervention appears to have a positive affect in reviving the moribund CMBS market which died following the sub-prime crisis in 2007. The federal reserve has been buying CMBS's as well as providing fresh capital to banks through the TALF program which allows banks to put up qualified CMBS and CDO's as security for new loans at very loan rates. The banks can then use these funds to issue new securitized loans to fund purchase and refinance of commercial loans.

Recent private CMBS offerings have had positive receptions in the market including a recent offering by JPMorgan in which Inland Western Retail Real Estate Trust Inc., an Oak Brook, Ill.-based non-listed REIT, closed a $625 million loan.

Wells Fargo, Goldman Sachs, Bank of America and JP Morgan, all have already announced their involvement in new CMBS deals.

Peter Schiff on Housing Video Blog

Peter Schiff shows his economic brilliance and foresight in this 10 minute video blog. Mr Schiff, who is running for the US Senate seat occupied by Christopher Dodd was one a few people who correctly foresaw the housing bubble. His common sense approach and plain speak make him a likable fellow who is still mocked and ignored by pundits and press for his criticism of mainstream (Obamanomic)thinking.

In this video, Mr. Schiff gives his analysis of the days financial events and talks about the bond market, debt ceiling and a recent WSJ article about people walking away from their homes.

House Flipping Makes A Comeback

Check out this video from tonight's Kudlow Report.

The experts make the case that you need to be an expert or avail the services of one to make money in foreclosures and short sales.

They make the point that you cannot enter the property and do an inspectin to see if the property has been trashed.

The leads offered by www.shortsaleleads.org are contacts with actual homeowners that are interested in doing a short sale.

Mortgage Trade Group Reports Increased Commercial Delinquencies

Commercial real estate loans showed continued increases in the rates of delinquencies, the  Mortgage Bankers Association (MBA) reported in a recent survey.

MBA's Commercial/Multifamily Delinquency Report keeps records on delinquencies of commercial real estate loans.


Last quarter borrowers of commercial mortgage backed securities (CMBS) loans topped 4 percent during the quarter.  They also reported that life insurance companies who own commercial loans had loans that fell behind at an increase by a 1/4 of a percent and the 60+ day rate on multifamily loans in Fannie Mae's portfolio increased by 0.11 percentage points to 0.62 percent. 

The increase in delinquency rates is expected to continue throughout 2010 and peaking in 2011.  There is about $300 billion in negative equity overhang that needs be refinanced in 2010 and 2011.  Much of these loans will end up in foreclosure or sold as short sales or modified to either extend the loan maturity or reduce the principal balance.

The government recently announced guidance for prudent commercial loan work outs.  This policy change, while beneficial for some borrowers only serves to extend the problem as banks are unwilling to write down loan balances when their government handlers and owners let them keep the loans on the books at full value in the absence of mark-to-market accounting.

Treasury Issues Guidance On Short Sales

The Treasury Department has issued long-awaited guidance to streamline short sales.

Under "The Home Affordable Foreclosure Alternatives Program" the Treasury will be issuing checks to homeowners for $1500 and $1000 to lenders when they execute a short sale agreement.  Second lien holders will get up to $3000 to release their interest in a property. The lender must forgive the unpaid balance on the loan. 

Under the new guidelines, lenders have only 10 days to approve or disapprove the transaction.

Here is a link to the Government guidance. https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf

Further declines in commercial real estate forcast by Moody's

Moody's said in a press release last week that commercial real estate will continue to decline in value before a long term stabilization occurs and the market begins to recover.  The income stream produced by commercial real estate which has been sold to investors as CMBS will not recover soon causing further declines in CMBS values.  Maturing CRE loans in these pools will not be able to be refinanced as maturities of bubble value loans approach.

The rating agency says that they will be downgrading CMBS tranches that were issued as late as 2008 - well into the bubble deflation.  They went on to say that the cash flows for properties with short-term lease structures, such as hotels and multifamily, will likely hit bottom in 2010 or early 2011. The bottom for office, retail and industrial properties will take longer to form.

Moody's says that property values have deflated 42.9% from their peak and thinks that the bottom will hit in up to two years from now at a 45-55% decline from the peak.

Source: http://v3.moodys.com/viewresearchdoc.aspx?docid=PR_190851

Recent Commercial Mortgage Modification Consulting Requests

A strip mall owner in Las Vegas paid $7 million with $2.5 down payment in 2005.  Today the property is only worth $3 million and the loan amount is still over $4 million.  The property is not producing enough cash flow to cover the debt service and the loan, which is in a CMBS pool has been assigned to a special servicer.

The property has a 45% occupancy and the existing tenants are clamoring for lease modifications.  Cash flow is declining as the vacancy rate is expected to increase over the next 12 months as businesses in the area are closing and unemployment remains over 13%.

Considering the fact that the property can not sustain the debt service for this loan amount, the note holder, or in this case the bond holders are going to take a hit.  How much of a hit is what is up for negotiation.

The loan may have already been removed from the CMBS pool because of its non performing status and sold to an investor for as little as 20 cents on the dollar or even less.  In that case the owner of the note, who may have paid only $1 million would be willing to accept an offer that provided a handsome return on investment.

If the property owner could arrange for a new investor to come in and buy out the note, then refinance based on the current value the new loan amount would be $1.8 million and even with 50% occupancy the property would cash flow.

While this example makes some big assumptions, the principles are sound.  The people taking the biggest hit are the CMBS bond holders.  The fact is they took the hit already in 2008 when the CMBS bond market seized up.

If the loan is still part of the CMBS pool, it can be removed from the pool and sold or the servicer can agree to a modification that would reduce the principal balance, extend the term or lower the interest rate.

In October the Treasury Department changed the IRS rules to allow CMBS servicers to change the terms of the loans without the IRS calling into question the tax exempt status of the REMIC.  Prior to this rule change servicers could only foreclose or offer short term changes to CMBS loans.

Real Estate Attorney Stephen Meister Video On Fox Business

Watch this fascinating discussion about the next bailout and real estate crash with attorney Steven Meister on Fox Business.

 http://www.foxbusiness.com/search-results/m/27371346/fed-s-housing-fix-broken.htm

As readers of this blog know I had predicted this crash a year ago and the next "Mother of all bailouts", now finally it has hit the main stream media.

Fed Survey Shows Banks In Line With Pretend & Extend

The Federal Reserve released its Senior Loan Officer Opinion Survey on Bank Lending Practices. The results showed an increase in residential lending over the past three months but showed a continual decline in commercial lending activity.

The survey asked bankers why CRE lending has declined in 2009 and also addressed commercial real estate loans on their books that were scheduled to mature by Sept 09.

The table below shows their responses:

The survey showed that 75% of respondents said they had extended at least 25% of the loans that were maturing. This indicates that commercial real estate loans are frequently being extended.

This statistic will no doubt go up next year as the brunt of the maturing commercial loans come due. These maturing loans were often the most toxic loans made at the height of the bubble at a time when underwriting guidelines were at their lowest historical levels.

The chart below shows the demand for commercial real estate  is at extremely low levels even with a spike in maturing loans looming.

 

Tightening credit standards for commercial loans indicate that the months ahead present significant challenges for commercial real estate financing in the foreseeable future.  The chart below shows the increasingly tight credit standards are being applied to new loans.

The complete survey results can found here http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200911/fullreport.pdf.

Commercial Real Estate Bottom Expected in 2011

In spite of recent rosy reports of a recovery in commercial real estate (see MIT commercial property price index posts first increase in over a year) the bottom is a long way off as unemployment continues to climb into the double digits.

There is no recovery for commercial real estate when jobless numbers are increasing. In order for rents to stabilize and prices to recover, people have to get back to work.

A report published by the Urban Land Institute and accounting firm PricewaterhouseCoopers LLP predicts that nationwide commercial real estate vacancies will continue to increase and rents will decrease across all property sectors before the market hits bottom in 2010.

The report was based on interviews and surveys involving some 700 industry professionals around the country. Participants projected national value declines of 40 percent to 50 percent off 2007 market peaks. Survey participants also believe that 2010 and 2011 will present buying opportunities at or near cyclical low prices.

This creates an opportunity for professionals who have experience in this area to offer commercial loan modification services to property owners. Leadsnet Inc., has set up a website (http://www.commercialmodification.com) for commercial property owners to get connected with industry professionals who can offer loan modification services.

Senate Votes To Extends First Time Home Buyers Tax Credit

The Senate approved an extension of the first time home buyers tax credit of $8000 and also added a provision to allow existing homeowners to get $6500 from the rest of the taxpayers if they buy a home. The credit can be claimed by anyone that buys a home for under $800,000.

With the FHA underwriting loans with only 3% down this means you can buy a $250,000 home with no money down. This will have the affect of prolonging the housing decline over a longer period of time. A large percentage of these homes will go in to foreclosure because the buyers will have no equity.

Many homeowners who are already in negative equity situations are increasingly turning to shorts sales. In a short sale transaction the debtor is relieved of the mortgage and the bank accepts a reduced principal balance. This avoids the cost of foreclosure and allows the seller to walk away without the severe hit to his credit that a foreclosure would.

Recently the Obama administration stepped up its efforts to get lenders to speed up the process of allowing short sales. In the past, transactions would typically take six to nine months to complete.

Government Gives The Green Light To Pretend and Extend

Last week government bank regulators officially put their blessing on the practice of "pretending and extending" by issuing guidance to banks that allow them to modify commercial loans without being viewed unfavorably by their regulators. It has become clear to Washington that the next banking crisis and government bailout is right around the corner. They have taken this step to ease the pain that is sure to come.

Analyst estimate that there is about $270 billion in negative equity that has to be resolved in the next few years. This comes from about 1.5 trillion in debt that is maturing on CRE loans. This property can not be refinanced because of the negative equity. If the banks were to foreclose and not modify the loans, they would be forced to show the real value of the property on their books, wiping out the profits they reported earlier this year and causing a liquidity crisis in an already overstressed banking system.

By allowing the banks to modify these loans, the bankers and property owners are allowed to "kick-the-can" down the road some more years.

Prior to this change in guidance, if a bank were to modify a loan, and the loan amount was greater than the market value, the loan would have been considered "adversely credit classified". Such a loan modification wold not have been considered prudent based on sound banking principles. This new guidance allows them to modify the loans even if the loan amount exceeds the market value.

Property owners ought to contact their bank or a professional that specializes in commercial loan modification.

FDIC Adopts Guidance on Prudent Commercial Real Estate Loan Workouts

FDIC Adopts Guidance on Prudent Commercial Real Estate Loan Workouts

FOR IMMEDIATE RELEASE
October 30, 2009

The Federal Deposit Insurance Corporation (FDIC), in coordination with the other member Agencies of the Federal Financial Institutions Examination Council (FFIEC), adopted a policy statement today supporting prudent commercial real estate (CRE) loan workouts. This policy statement stresses that performing loans, including those that have been renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral declined.

This policy statement provides guidance to examiners, and financial institutions that are working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. It also recognizes that during these difficult economic circumstances, continued credit availability to businesses, especially small businesses, is challenging, even where borrower performance has been acceptable. This policy statement reflects the appropriate balance of prudent credit practices and meeting legitimate credit needs.

The FFIEC Agencies recognize that prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions. This policy statement details risk-management practices for loan workouts that support prudent and pragmatic credit and business decision making within the framework of financial accuracy, transparency, and timely loss recognition. Financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers' financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications.

The policy statement includes examples of CRE loan workouts. The examples, provided for illustrative purposes only, reflect examiners' analytical processes for credit classifications and assessments of institutions' accounting and reporting treatments for restructured loans. The policy statement reiterates existing guidance that examiners are expected to take a balanced approach in assessing institutions' risk-management practices for loan workout activities.

The member Agencies of the FFIEC include the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the FFIEC State Liaison Committee. The FDIC currently chairs the FFIEC.

http://www.fdic.gov/news/news/financial/2009/fil09061a1.pdf

CLARIFICATIONS AND CHANGES TO THE REMIC RULES

The Commercial Mortgage Securities Association has issued the following talking points in regard to modification of commercial mortgages within Real Estate Mortgage Investment Trusts (REMIC's)

CLARIFICATIONS AND CHANGES TO THE REMIC RULES




The changes to the REMIC Rules addressing CMBS loan modifications issued by the IRS have garnered significant attention and commentary from CMBS industry participants and spectators, sparking a conversation among borrowers, lenders, servicers, investors, and industry groups about the practical effect these changes will have on their business. While the Revenue Procedure and Regulations relax certain constraints on modifying mortgage loans held in REMICs, it is not clear how significant an impact these changes will have in practice.

1. The flexibility incorporated into the changes in the REMIC Rules may allow modifications to be made earlier without incurring adverse tax consequences if the servicer reasonably believes that there is a significant risk of default. These changes do not, however, accelerate the timing of transfers to the special servicer, allow for modifications not in the best interest of the certificate holders, negate the need for special servicer or controlling class holder approvals, or amend any terms of the servicing agreements governing servicing of the loan. Therefore, the impact of the new REMIC guidelines in existing transactions will not be significant.

2. As has always been the case, borrowers should work with their servicers when they have questions or concerns.

(a) The primary servicer remains the initial point of contact for the borrower. The borrower most likely sends loan payments and financial statements to the primary servicer and the primary servicer is the day to day contact for the borrower. The most effective means of communication with the servicer is by providing a specific written request with supporting documentation regarding the status of the loan, collateral property and market. The changes to the REMIC Rules do not change this.

(b) Under the Pooling and Servicing Agreement (“PSA”), it is the primary and master servicers who are responsible for the loan while it is performing, and the special servicer will, in most cases, take over responsibility should the loan go into default or be at risk of imminent default. The changes to the REMIC Rules do not change this.


(c) The provisions of the PSA determine whether the special or master servicer will work with the borrower on a proposed amendment or extension. In virtually all cases, the special servicer is responsible for these matters. In general, it is the master servicer, governed by the terms of the PSA, which determines if and when a loan should be transferred to the special servicer. The changes to the REMIC Rules do not change this.

(d) A borrower’s and lender’s rights and obligations with respect to the loan are set forth in the loan documents. Any change or modification to the loan documents must be agreed to by the lender and borrower. Once a loan is securitized, the servicer represents the collective interests of the Trust. The changes to the REMIC Rules do not mean that a lender/servicer is required to agree to any modification, amendment or waiver of the terms and conditions of the loan documents.




(e) All servicers must adhere to the servicing standard (the “Servicing Standard”) which places a responsibility on the servicer to act in the best interests of the investors under the trust and other interest holders in the loan. If the loan becomes troubled, and the servicer concludes a modification is the route to the highest recovery on a net present value basis for the collective interest of the bond holders and other interest holders, it will be pursued. If a foreclosure is the best route, it will be pursued. The changes to the REMIC Rules do not change this.

3. While the REMIC Rules play an important part in the overall structure of the commercial mortgage‐backed securities market, the REMIC Rules and the recent clarifications and changes to the REMIC do not change:

(a) The terms of:
(i) the mortgage loan documents governing the loan;
(ii) the PSA that specifies the responsibilities and duties of the loan servicers, the rights and priorities of investors and the timing of transfers to the special
servicer. Generally transfers can only occur in the case of a default or imminent
default which will not be cured within a specified period of time. This is not the
same as a “reasonably foreseeable default” as described in the Revenue
Procedure.

(b) The Servicing Standard is the criteria servicers must use when evaluating potential extensions or other loan modifications. It remains the same and servicers still cannot change the terms of a loan unless the changes, taken as a whole, benefit the investors and other interest holders of the Loan.

4. The REMIC Rule changes loosen some tax restrictions and enhance opportunities for discussion of loan extensions or other modifications without concern that such actions would threaten the REMIC status of the trust. Now, if, based on all the facts and circumstances, the servicer reasonably believes that there is a significant risk of default upon maturity of the loan or at an earlier date, then the IRS will not challenge the REMIC status of the trust if the loan is modified, provided the balance of the requirements set forth in the REMIC Rules are met. This, however, does not mean that under any PSA a loan can be modified simply because the tax rules permit modification.

5. If a borrower believes a significant risk of default exists and wants to request a loan modification or extension, the borrower generally should:

(a) Conduct a review of the loan documents to determine their contractual rights and obligations.

(b) Carefully analyze their property condition, performance and outlook to determine what factors indicate a significant risk of default, and make an assessment of the best plan to enable the borrower to perform its obligations under the loan.

(c) Prepare a written request outlining the results of the assessment, together with a proposal for the lender to consider. Factors generally considered by servicers in reviewing such a request include the original use of the mortgage proceeds, the current condition of the property and its income stream, projections regarding how that income stream will change over the course of the remaining loan term, significant lease non‐renewals or terminations, the number and timing of refinance applications and rejections, equity infusions or contributions the borrower is prepared to make, and other factors affecting the requested loan modification or extension, including guarantees or additional collateral. It is important to provide evidentiary back up to support forecasts, conditions and assumptions.

(d) Communicate in writing with the servicer to which the borrower submits its monthly debt service and financials reasonably in advance of the perceived events creating risk of default.

Peter Schiff on Real Estate Investing

In this video, Peter Schiff who is running for Senate in CT offers his perspective on real estate investing. Schiff, who correctly predicted the housing bubble and collapse is still bearish on real state in the US and recommends investments outside the United States.

Interagency Bank Regulators Prepare Commercial Modification Guidance

Washington bank regulators are putting the final touches on administrative guidance to banks on commercial loan work outs. The guidance will be designed to allow banks to modify the terms of loans that are maturing or going into default within the framework of the regulatory agencies.

In testimony last week Federal Reserve Gov. Tarullo said the following in a prepared statement.

We are currently in the final stages of developing interagency guidance on CRE loan restructurings and workouts. This guidance supports balanced and prudent decision making with respect to loan restructuring, accurate and timely recognition of losses and appropriate loan classification. The guidance will reiterate that classification of a loan should not be based solely on a decline in collateral value, in the absence of other adverse factors, and that loan restructurings are often in the best interest of both the financial institution and the borrower. The expectation is that banks should restructure CRE loans in a prudent manner, recognizing the associated credit risk, and not simply renew a loan in an effort to delay loss recognition.

Chairman Bair from the FDIC added the following.

In addition, the federal banking agencies will soon issue guidance on CRE loan workouts. The agencies recognize that lenders and borrowers face challenging credit conditions due to the economic downturn, and are frequently dealing with diminished cash flows and depreciating collateral values. Prudent loan workouts are often in the best interest of financial institutions and borrowers, particularly during difficult economic circumstances and constrained credit availability. This guidance reflects that reality, and supports prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition.

This guidance is expected soon and it will be posted on this blog as soon as it is available to the public.
Register at www.commercialmodification.com if you are a commercial property owner and would like to have a consultation with an experienced commercial mortgage negotiator.

Regulators Discuss Commercial Loan Modification

Last week, the nations top banking regulators met on Capitol Hill to report to the Senate Banking Subcommittee on the financial health of the nations banks and financial industry. The panel included Sheila Bair, Charmain of the FDIC, and other regulators from the Fed and OCC.

The officials told the committee that losses on CRE loans posed the biggest risk to the banking system and in particular smaller banks whose exposure is greater to commercial real estate loan losses. Regulators said the government would issue guidelines to help the banks modify commercial mortgages.

Ms. Bair said that they are in the final steps of releasing administrative guidance to banks with examples as to what would be a prudent loan work out for commercial borrowers.

FHA the new subprime hazard

Please consider this discussion of the FHA with Larry Kudlow which I wrote about last month.  My original blog post appears below.

 

FHA - The new subprime hazard

Wednesday, September 2, 2009

With the FHA replacing the subprime mortgage market with ridiculous underwriting guidelines we are setting ourselves up for the next bailout. Why does the government allow this foolishness? Lending with just 3% down is utter folly and the epitome of stupidity. Add the tax credit for people have not owned a home in 3 years (so-called first time home buyers) and that makes it 100% financing. If the market drops another 10, 20 or 30% do you think these borrowers are going to make the payments? Many won't. Too many to sustain the FHA causing it's ultimate failure.

Interest in commercial loan modification business intensifies.

Interest in the commercial mortgage modification consulting business has intensified as the residential loan modification industry in California is squashed in its infancy by SB 94. 

The law prohibits advance fees for loan modifications on residential properties of 4 units or less.  The new statute was enacted to protect the public from a group of attorneys (16 in total are being investigated) who allegedly took advantage of vulnerable homeowners by collecting advance fees without obtaining results for the clients. In a few cases homeowners actually lost their homes when they believed the attorneys in question were processing modifications on their behalf.

In one fell swoop thousands of for-profit housing counselors, intake clerks, receptionists and loan modification processors got pink slips this week.  While there are some companies that will remain in the business, they can no longer collect any fees until specific work and milestones have been completed. 

Essentially an attorney or loan modification company would have to provide unsecured financing for people who have already demonstrated their inability to pay.  Recent data show that over 50% of modified mortgages re-default within six months. This demonstrates the fact that the credit risk is too great for service organizations that rely on income produced by service fees to finance continuing operations. 

Those who have built their livelihood on helping homeowners get modifications in California have to find a new line of work. Homeowners will have a hard time finding  someone that will take their case under the new statutory terms.

Mortgage brokers and attorneys who were doing residential loan modifications are now looking at the commercial mortgage modification business as an alternative.  Advance fees and retainers are not prohibited for commercial property under SB 94.

There are many misconceptions about the commercial mortgage modification business especially in how it relates, in scope to the residential business.  Let's have a look at the numbers. 

There are about 125,000,000 single family homes in the United States.  Extrapolating the data released from RealtyTrac today who said that foreclosure reached one in every 136 homes, gives us a little over 900,000 homeowners in imminent danger of losing their home.  Several hundred thousand more loans will default in the coming quarters as Alt-A and the toxic pick-a-payment loans reset in 2010, peaking in 2011.

The commercial property marketplace is much smaller in terms of the number of property owners.  There are about 5 million commercial properties in the US. With the default rate on commercial loans running just under 3% this represents about 150,000 properties in which the owner is in need of modification consulting.  There are more potential clients that are not in default but this number represents a nominal market place population of under 50,000 individuals since many commercial property owners have more than one property.

With the termination of an entire industry in California, somewhere around 10,000 and  25,000 entrepreneurs and their employees in California are looking for a new business model.  Many are exploring commercial modification as a new line of work.

The misconceptions about the commercial modification business starts with the numbers and continues with the scope of work required to complete a successful modification.  In residential modifications, 70% of the deals were cookie cutter deals that fit nicely within the Obama modifications plans like HAMP and Making Home Affordable and other programs put forth by the FDIC and Federal Reserve.  There are rarely any negotiations.  The loan mod company simply submits a package that has been underwritten according to the guidelines published by the FHA, FNMA and Freddie Mac and approved by the loan mod company before being sent to the loan servicer.  This is why many companies claimed a 90% or more success rate. They were easy to do if you knew how to get it done.

The commercial modification business involves real negotiations, in-depth market research, financial analysis and hours of tedious data collection, discovery, verification and reporting.  Most of this is foreign to the residential mortgage broker turned loan modification consultant.

I am getting several calls and inquires everyday from loan mod companies who are in this position.  On one call I got, the owner of the company who has been processing hundreds of deals per week for residential modifications asked me how much for commercial leads and could he get a volume discount.  I asked what he needed and he replied that he needs 500-1000 leads per week.  I chuckled. 

The nitty gritty on SB 94

I found a very good, factual article on SB 94 courtesy of 360 Realty in Los Angeles.

The new law prohibits any person (including real estate licensees) who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform residential mortgage loan modifications or other forms of mortgage loan forbearance, for a fee or other compensation, from: claiming, demanding, charging, collecting or receiving any compensation until after the licensee has performed each and every service the licensee contracted to perform or represented that they would perform. In addition, licensees cannot take any wage assignment, any lien secured by real or personal property, or any other kind of security to secure payment of compensation in association with their acts. Moreover, no licensee can take any Power of Attorney from any borrower, for any purpose. This part of the law applies to 1-4 residential units only. Violation of this provision would constitute a misdemeanor, with a fine of up to $10,000, plus up to one year in jail. If the violator is a corporation, the maximum fine increases to $50,000. These remedies are in addition to any others imposed elsewhere in the law. The bill specifically exempts parties who own or are servicing the loan in question before the terms of the loan are modified.

Further, the new bill requires any person, including licensees, to provide the following written disclosure in at least 14 point bold type regarding loan modification fees prior to entering into any fee agreement with a borrower:
It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.

If loan modification or other loan forbearance services are negotiated or offered in Spanish, Chinese, Tagalog, Vietnamese, or Korean, a translated copy of the statement above must be given to the borrower in that foreign language. A real estate licensee who violates this new law would be subject to discipline by the Department of Real Estate, and violation of this provision would also constitute a misdemeanor, with a maximum fine of $10,000, and up to one year in jail. If the violator is a corporation, the fine increases to $50,000. These remedies are in addition to any other imposed elsewhere in the law. The bill specifically exempts parties who own the loan or are servicing it before the terms of that loan are modified.

The definition of the term, "Advance Fee" has been significantly changed. Now, an Advance Fee includes any fee, regardless of the form, that is claimed, demanded, charged, received, or collected by a licensee from a principal before fully completing each and every service the licensee contracted to perform, or represented would be performed. Advance Fees now include: a fee for a listing, an advertisement or an offer to sell or lease property (other than in a newspaper of general circulation), issued primarily to promote the sale or lease of a business opportunity or real estate, or for a referral to real estate brokers or salesmen, or for soliciting borrowers or lenders for, or to negotiate loans on, business opportunities or real estate. Thus, licensees must be much more careful about how they charge for services they render. The law now requires real estate licensees to submit all Advance Fee materials to the Real Estate Commissioner before they are used (including contract forms, letters, cards used to solicit prospective sellers, and radio and TV ads), if they are intended to be used to solicit prospective owners and sellers to enter into an Advance Fee Agreement. All materials must be submitted to the Real Estate Commissioner for approval at least 10 calendar days before the materials are used. If the Commissioner finds that the materials are deceptive, the licensee may be Ordered not to use them. The fine for violations of the Advance Fee law has been increased from $1,000 to $2,500, plus violators may spend up to six months in jail. In addition, a violation could result in discimplinary procedures with the Department of Real Estate.

Existing law defines a "Foreclosure Consultant" as any person who (after the recording of a Notice of Default) solicits, represents or offers to perform for compensation or who performs any service for compensation which the person in any manner represents will in any manner do any of the following: (1) Stop or postpone a foreclosure sale; (2) Obtain any forbearance from any beneficiary or mortgagee; (3) Assist the owner to exercise their right to reinstate the existing loan; (4) Obtain any extension of the period within which the owner may reinstate his or her obligation; (5) Obtain any waiver of an acceleration clause contained in any promissory note or contract secured by a deed of trust or mortgage on a residence in foreclosure or contained that deed of trust or mortgage; (6) Assist the owner to obtain a loan or advance of funds; (7) Avoid or improve the owner's credit resulting from the recording of a notice of default or the conduct of a foreclosure sale; (8) Save the owner's residence from foreclosure; (9) Assist the owner in obtaining from the beneficiary, mortgagee, trustee under a power of sale, or counsel for the beneficiary, mortgagee, or trustee, the remaining proceeds from the foreclosure sale of the owner's residence. This bill excludes real estate licensees and California Finance Lenders (CFL) licensees from the definition of a Foreclosure Consultant, when they are acting under the authority of that license. Under the new law, CFL licensees are now prohibited from making materially false or misleading statements or representations to borrowers about the terms or conditions of that borrower's loan when making or brokering a loan. Senate Bill 94 remains effective until January 1, 2013, and it will expire at that time unless further action is taken by the California Legislature.

SB 94 Signed into Law

SB 94 has been signed by Governor Schwarzenegger. In a statement regarding the veto of the more restrictive AB 764 he said..

"Although I support the prohibition of individuals charging advance fees for mortgage loan modifications, I do not agree with the provision of this bill that will only allow fees to be collected if a modification is successful. This could adversely affect legitimate businesses that provide loan modification services. As such, I am signing SB 94 that accomplishes this prohibition against advance fees without unnecessarily harming legitimate companies."

The law applies to mortgages on primary residences and does not restrict the ability of  attorneys and consultants to collect advance fees for modification of commercial mortgages.

CA SB 94 Leaves Homeowners in Unfair Fight

Going to a gun fight with with a knife isn't likely to end very well. With the passage of SB 94 this is exactly what the California legislature and the Governor are asking California homeowners do.  The sweeping law, that will be signed next week by Governor Schwartzenegger will make it a crime for anyone, including attorneys to accept a fee in advance for the purpose of loan modification.

The bill authored by Rep. Calderon was heavily backed by banking interests and lobbyist for the banking industry. The law carries an urgency provision which makes it take effect immediately upon the Governors signature.

Oddly enough, the bill does not make any provision for banning advance fees earned by attorneys and others who work on behalf of banks and loan servicing companies prior to a successful loan modification.  These lawyers are still able to collect large fees from banks to ensure that the collection and foreclosure process works to the banks benefit.

Commercial Real Estate Decline

Please consider these comments from Steve Sakwa of the International Strategy & Investment Group



Mr Sakwa expects CRE markets to bottom out in the next 3-4 quarters.

The Danger Point

Danger does exist of the means taken proceeding to unwholesome inflation.  If the Government does not carry out its intention of reducing its expenditure and so of balancing its budget, and makes up tremendous deficiency by borrowing, with a consequent continual emission of notes, the people would lose confidence in their currency, and there would be a flight from the dollar...

Interesting current events?  No, this is a quote from "The Sydney Morning Herald. - Mar 11, 1933" (http://tr.im/AzVK). In an article describing the government attempts to cause "wholesome" inflation.

At that point in our history, we were emerging from the great depression.  Deflation was countered with inflation of a sound money supply because federal reserve notes (dollars) were exchangeable in gold at the Federal Reserve Bank.

Today, we find ourselves in a  similar situation.  An asset bubble has burst and the government is attempting to reflate it by use of inflation.  The key difference today is that the government can't come out and say they are trying to cause inflation because Federal Reserve Notes are nothing more than paper and can not be exchanged for gold.  All they can do is print more and hope that no one notices that they have no intrinsic value like real money.

Spike in Commercial Modification Requests

We have seen an increase in the number of property owners requesting consultations for commercial modifications at www.commercialmodification.com. The IRS rule change last month is mainly responsible for the 30% increase in lead production.

Our new commercial lead sales portal www.commercialmodificationleads.com allows commercial mortgage consultants, attorneys and mortgage brokers to register to buy the leads on a per lead basis or monthly subscriptions for exclusive or non-exclusive leads.

Qualified users can log in and see the leads before any purchase or any financial commitment.

Recent Commercial Mortgage Modification Consulting Requests

Commercial property owners are requesting help from consultants for the purpose of modifying their commercial loans at CommercialModification.com. Building owners are looking to preempt defaults as they can see that their notes are coming due or resetting and there is not enough equity to refinance.

The recent projects we have seen come through the site include two 42 unit buildings valued at over $6 mil., that have been put into default by the servicer because of missed property tax payments. Current occupancy is 95% and rent roll $62K. The owners is trying to reinstate with better terms or refinance.

An owner of a retail showroom and warehouse in northern California who put $1 million down payment a few years ago has lost nearly all his equity. He is now two months behind and making weekly payments on a loan that is close to the value of the property.

The owner of a 16 unit apartment complex in Mesa, AZ., who put $300K down 3 years ago has a loan reset in Jan 2010 when it adjusts upward. It is now only worth $400K and the loan amount is $688K. The owner of this loan faces a substantial loss if a modification is not completed before the reset date as financing is unavailable to pay off the resetting loan and the property would sell for substantially less if there were a forced liquidation. The cash flow on the property is insufficient to cover the debt load so modification is a best case scenario.

This property owner wanted to consult with firms who have a good track recorded in designing modification programs that are acceptable to the bank and servicing companies. A third party negotiator always puts you in a superior bargaining position in any type of negotiation.

The owner of 37 units in Darby PA purchased for $1,400,000 and now only worth $450,000 has a loan of $825,000 @ 13% fixed. This is another case where the debt service is a hardship because of declining rents and increasing vacancies.

Each of these unique situations present challenges for both the lender and borrower. Special Servicers, who are hired by mortgagors to deal with large commercial loans that are in default or likely to default, now have more leeway in negotiating workouts with property owners whose mortgages have been financed by selling shares to investors in the form of commercial mortgage backed securities.

Prior to a recent IRS rule change (IRS 09-45), special servicers had been opposed to any change in the status quo. The barrier removed by the Treasury department, which I applaud, allows the REMICS's to change the terms of these loans without jeopardizing their tax exempt status.

Leadsnet Inc Press Release

Sep 23, 2009 – South Lake Tahoe, CA. Today Leadsnet Inc. a leading provider of commercial mortgage leads announced their marketing partnership with Genesis Financial and Real Estate Services of Scottsdale Arizona. Genesis provides loan and workout consulting services to owners of commercial properties nationwide.

"This partnership allows us to bring more value to the table on behalf of commercial real estate owners who want help in negotiations with mortgage servicers", says Ted Schmidt, President of Leadsnet. Leadsnet owns and operates the commercial mortgage modification web portal www.CommercialModification.com, the country’s top ranked website for commercial modification queries.

With the number of commercial loans coming due in the next few years combined with the fact that commercial real estate values have fallen often 30% or more, balloon loans that are maturing will fail. Properties with income sufficient to service the debt cannot even refinance if the value of the property is less than the indebtedness. This imbalance is estimated to be about $270 billion and growing.

Many commercial properties are experiencing increased vacancies along with decreasing rental rates. This disastrous combination makes the monthly debt service almost impossible for borrowers. “Sometimes there is a better alternative to foreclosure” quotes Roger Simard, president of Genesis Financial and Real Estate Services. “In our consultative and advisory role, we use our extensive network of experts in accounting, commercial real estate and bankruptcy law and mortgage lending to assist us.

Sometimes alternative solutions such as purchasing the note, to assist the owner in stabilizing their property or bringing in an equity partner is the best solution”, added Simard.

Recent changes in IRS tax rules allow owners of commercial property whose loans have been packaged into CMBS (commercial mortgage backed securities) and sold to investors by REMIC's (real estate mortgage investment conduits) to modify loans prior to default without jeopardizing the REMIC's tax exempt status.

"Since the IRS rule change last week we have seen a marked increase in traffic and lead production at our website. The past cases that we have attempted modification on and were denied because they were CMBS loans, can now be reworked in light of the changes, With Genesis on board, I am confident that the commercial property owners we refer are in very capable hands", says Mr. Schmidt.

IRS Relaxes Rules for Modification of Commercial Mortgages

Effective today, the IRS has issued a new rule (IRS Revenue Procedure 2009-45 http://www.irs.gov/pub/irs-drop/rp-09-45.pdf) that eases the restrictions on modifications of commercial mortgages that have been packaged into commercial mortgage backed securities.

This action allows borrowers to open discussions with the loan servicer prior to any default in an attempt to work out the loan. Prior to this new rule only a very small number or loans in a servicing pool could be modified and they must already have been in arrears.

Commercial property owners can get a free consultation at http://www.commercialmodification.com

Banking on Geithner

Last week I went to went to Washington DC to participate in the CNBC Town-hall meeting with Treasury Secretary Tim Geithner. I had some tough questions for him regarding the treasury departments stance on modification of mortgages that have been packaged into commercial mortgage backed securities (CMBS). At issue are the IRS rules that prohibit modification of these commercial loans. The problem is that real estate mortgage investment conduits (REMIC) are not allowed to acquire new loans after the formation of the REMIC. A loan modification is considered a new loan if if it is adjusted beyond 1/4 of a point or more than 3 years.

The Treasury did ask the public for help in formulating guidance on the issue back in 2007 (http://www.irs.gov/pub/irs-drop/n-07-17.pdf) and Geithner was questioned by congress but the Treasury has yet to issue any guidance on the subject.

Unfortunately, the CNBC Town-hall meeting was too short for me to get to ask the Secretary the questions I had prepared and instead the meeting dealt with broader issues. The meeting can be seen below.

FHA - The new subprime hazard

With the FHA replacing the subprime mortgage market with ridiculous underwriting guidelines we are setting ourselves up for the next bailout. Why does the government allow this foolishness? Lending with just 3% down is utter folly and the epitome of stupidity. Add the tax credit for people have not owned a home in 3 years (so-called first time home buyers) and that makes it 100% financing. If the market drops another 10, 20 or 30% do you think these borrowers are going to make the payments? Many won't. Too many to sustain the FHA causing it's ultimate failure.

How to pay the national debt.

With the absence of a government plan to pay off the national debt I put forth my own.

Here are the assumptions.

We owe about $11 trillion
Our debt will grow by $2.3 trllion. per year for 10 years
In 2019 our total debt will be about $33 trillion
With 300 million people thats about $110,000 per person


If we start today and each person pays about $1,166 per month for the next ten years, at the end of ten years our debt will be paid.

I have 5 people in my family and I am the only one who produces an income, so my share is $5830 per month. Of course this is on top of the taxes I already pay. I better get to work...

More Questions For Geithner

Here are some suggestions for questions I will ask Treasury Secretary Timothy Geithner at the CNBC Town hall meeting on Sept 10.

Given the existing public and government debt of over $11,000 bn. almost $40,000 per man woman and child in our country and the planned deficits of the future how will America pay off her debt?

Banks are reporting profits since the stimulus suspended mark-to-market accounting, this allows banks to carry these toxic mortgage assets on their books at unrealistic inflated bubble values. With the overhang of commercial real estate that must be refinanced over the next few years, the chickens are coming home to roost when the properties can not be refinanced due to tightened underwriting criteria and declines in market values. Is the Treasury prepared to bailout these bank, insurance companies and pension funds if they become under capitalized as a result of commercial delinquencies?

Do you support more transparency at the Fed, in particular shedding the light of day on the emergency lending to troubled financial institutions or the audit the Fed bill?

Do you support giving more power to the Fed as a so-called "super- regulator"?

Questions for Geithner regarding commercial mortgage modification

By Ted Schmidt

I was invited to Washington, D.C. by CNBC to question Treasury Secretary Tim Geithner in a town-hall meeting on September 10. The question I plan to ask is this:

In July you testified before the House Financial Services Committee. Rep. Maloney asked what administrative guidance the Treasury will issue regarding commercial loan modifications as they did with residential modifications. You said "we have not made a judgment as to whether that is necessary, appropriate or possible and would be willing to discuss it in more detail". Would you please elaborate on what plans the Treasury has to address the issue of commercial modifications?

What would you ask him?

A New Paradigm For Commercial Real Estate Financing?

By Ted Schmidt

Commercial real estate is financed primarily through three channels, portfolio lending, commercial mortgage backed securities (CMBS) and direct cash purchases.

Portfolio lenders are regional banks, insurance companies, pension funds and others that lend money directly to commercial property owners. These loans stay on the lenders books for the life of the loans. Portfolio lenders have pulled out of the market and are actively trying to reduce their exposure to commercial real estate.

CMBS loans are made by mortgage banks that fund the initial transaction and then sell the income stream that the loan produces as investment vehicles on the stock market. The CMBS market seized up in 2008 following the sub-prime crisis and even with efforts from the Federal Reserve with the Term Asset Lending Facility (TALF) program to "prime the pump" the market is still effectively locked down. The TALF program allows institutional owners of CMBS to use the securities as collateral for extraordinarily low interest rates loans. This was designed to grease the wheels of the CMBS market but does not address the nearly $270 bn. capital deficiency on the exiting $800 bn. in maturing loans in the next 2 years.

Effectively there is nowhere to go. The options for both borrower and lender are few. Fed Chairman Ben Bernake says that these loans "ought to" be modified. Portfolio loans have some chance of being worked out and restructured since it is easy to identify and contact the owner. The major obstacle for regional banks who own these loans is that if they modify the loan or accept a short sale, they have to recognize the loss on their books. At a time when they are already hurting for capital they are reluctant to acknowledge the loss and would rather keep it on their books at full value. CMBS's cannot be modified because IRS rules that would render invalid the mortgage conduits tax exempt status. (these rules were changed 09-16-09)

Commercial property buyers remain on the sidelines as values plummet. Property owners and portfolio lenders are in still in denial about the true market value and can only sell at distressed prices. Right now, only seller financing and all cash deals are being accomplished in the commercial real estate space. Property owners are seeking commercial loan modification alternatives.

We need an entirely new way to fund commercial real estate transactions. Will the government step in with a commercial real estate bailout? Who will they bail out? Will congress pass new laws that will circumvent servicing agreements and force investors to accept renegotiated terms? These questions need to be answered.

We need a new paradigm in commercial lending. Comments please.

No End In Sight To Commercial Real Estate Financing Crisis.

By Ted Schmidt

The commercial real estate crisis continues and it is proving to be more devastating to banks than the residential sub-prime crisis that sparked the financial meltdown in 2008. The Financial Post reported that US banks have been charging off (effectively assigning to the write-off bin) their commercial real estate loans at the fastest pace in since the late 1980s.

The majority of bank failures this year have been a result of commercial real estate losses and the number of regional banks that will fail in the coming quarters will increase. "Commercial real estate in the United States of America is going to get worse consistently over the next several quarters," said Jamie Dimon, CEO of J.P. Morgan Chase & Co., last month when he discussed his company's earnings.

The government will eventually attempt to solve the crisis by passing laws circumventing existing commercial mortgage backed securities (CMBS) servicing agreements and offer incentives to servicers as they do now for modifying residential loans. This will cause a tremendous loss of confidence among investors and cause more declines in CMBS values, bank write downs and failures.

Last quarter banks showed improved earning mostly because of free money from the Fed, trading profits and accounting changes. This will prove to be short term as the economic stimulus wares down and the inevitable change in monetary policy forces interest rates up.

Gov Has No Plan for Coming $1 Trillion CMBS defaults

Earlier this week, Fed Chairman Ben Bernake appearing on Capitol Hill said that commercial mortgages packaged into CMBS "ought to" be modified the same way residential mortgage backed securities are now.

The total arrears on all CMBS reached $817 billion in June. This represents a 4.5% delinquency rate. This has increased from a 2% rate last year and is expected to reach $1 Trillion by the end of the year.

On Friday, Treasury Secretary Timothy Geithner, appeared before the House Financial Services Committee.

Rep. Carolyn Maloney, who described the commercial mortgage situation as a "ticking time-bomb" questioned Geithner about commercial loan modifications. She asked what administrative guidance the Treasury will issue as they did with residential modifications. He said "we have not made a judgment as to whether that is necessary, appropriate or possible and he would be willing to discuss it in more detail".

Rep. Maloney went on to ask what the problem is with giving modifications on CMBS the same as residential mortgage backed securities. He said "it is an enormously complicated set of issues and we will talk to you and your staff about it later".

We will have to wait and see what will happen in the coming months as the fuse burns down. It is obvious by Giethners testimony that our leadership in Washington has no plan to deal with this issue. Giethner does not even know if it is necessary?

Commercial Mortgage Modification Consulting

Commercial Mortgage Modification Consulting, by Ted Schmidt

Commercial property owners are increasingly under distress in today's economy. Over the next few years billions of dollars in commercial mortgages that were made in the bubble years of 2004-2007 will need to be rolled over with new financing. The problem is that many of these loans were made with loose underwriting standards to feed the demand for CMBS's. Now that values have declined 30-50% or more in some hard hit areas, refinancing is out of the question. Right now the water is receding and curious onlookers are rushing to the water's edge as the tsunami approaches.

Property owners are left with few choices and loan servicers are left with even fewer. Commercial securitization and servicing agreements prohibit loan modifications without unanimous consent of the actual securities owners. This is almost impossible since they are spread all over the world. Furthermore, senior tranche holders will never agree to modification since they stand to lose money to the benefit of the riskier junior tranches.

The only way to modify these loans is by judicial cramdown in bankruptcy or by other action of law. At some point the government will get involved to make provisions for commercial loans to be modified. The first few bailouts did not address the commercial real estate problem. There is likely to be a shift in political will towards forcing commercial modifications.

As for loans that are not securitized, there is an opportunity to negotiate and come to a resolution that works for all parties.

Consulting Opportunities

These business owners will want to prevent or delay a foreclosure to preserve the cash flow that they are receiving. In some cases these are high income individuals who have lost their primary source of income and are living off the cash flow from their building. Other cases are small businesses that have suffered a downturn in business and have fallen behind. The opportunity exists in helping these people save their property and preserve their income.

Difficulty in Restructuring Commercial Loans

By Dempsey Mork, managing partner of Whitehall Montague, investment bankers specializing in debt restructure and business organizations.

We are having difficulty in restructuring commercial loans in today's market. The primary reason is that Freddie Mac and Fannie Mae dominate this market as the number 1 and 2 purchasers of commercial mortgages. Both Freddie and Fannie have a policy of "no modifications" on commercial loans. This policy on commercial loans is the exact opposite of their policy on residential loans. In the residential loan market Freddie and Fannie are very willing to modify mortgages to keep borrowers in their homes.

There is no political pressure on Freddie or Fannie to change this policy. Moreover they do not want to be accused of bailing out fat cat developers or investors. Before mortgages were pooled and sold off as securities, we were able to sit down with lenders and attempt a workout. If the proposed restructure was acceptable to the lender, the loan was modified and foreclosure was avoided. That is not the case today.

I believe this policy accounts, in part, for the increase in Chapter 11's. As long a Freddie and Fannie continue with their "no modification" policy, I believe the use of Chapter 11's will become more common. As more borrowers learn that Chapter 11 can force a loan modification on an unwilling lender, the use of Chapter 11 will become more common. .....

Commercial mortgage modifications a challenge

In spite of increased traffic and interest in our commercial mortgage modification portal (see International Business Times) actual loan workouts have been scarce. Says Dempsey Mork of Whiehall Montegue and Associates, "the servicers of commercial mortgages which have been securitized (CMBS) are subject to strict servicing agreements and do not have the authority to modify the loans in many cases, as they do in the residential market." Whitehall consults owners of commercial property that hope to get their loans modified. He goes on to say that these loan servicers tend to be the same people that would underwrite the loan to begin with and are typically very knowledgable about the projects and their challenges.

A consultant can propose a modification plan that makes sense for all parties. Portfolio lenders are more likely to accept an offer since they actually are the owners of the notes. More often a forbearance agreement is negotiated which delays a foreclosure and gives the owner time to raise cash to bring the note current, file bankruptcy or sell the property.

As the commercial refinancing crisis looms, modifications of existing loans will be difficult and under current market conditions refinancing is almost impossible.

Ted Schmidt
President
Leadsnet, Inc