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. .....
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. .....
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While it's inevitable that the commercial market meltdown is gaining strength, the banks and thrifts need to be proactive in discounting the balances due on the notes quickly. Unlike the residential loans, which ultimately were modified, at a loss to the lenders, the lenders did not want to recognize the solution and acted slowly leading to further problems. One soltution might be for the bank to discount up to 50% of the balance of the loan only if the borrower can provide cash to pay off the balance of the loan in full. This will stimulate the commercial owners to have a stake in paying off the banks as opposed to dragging on the process.
ReplyDeleteThe problem is that the banks don't want to realize the loss on their books while they can still carry the assets at the inflated phony price that the absence of mark-to-market allows.
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