Commercial Loan Modification Blog

Transparency Coming to 'Extend & Pretend'

2011-05-20T10:20:00.000-07:00

More Transparency Coming to Hidden Costs of 'Extend & Pretend' Strategies

Troubled Debt Restructurings Expected To Rise as New Accounting Rules Just Weeks Away

May 18, 2011

The number of loans that banks have to classify as troubled debt could increase dramatically in a few weeks as a result of new accounting rules issued last month. The new push to reclassify some loans is already hurting some lenders, and the reclassifications are expected to shine a spotlight on the commercial real estate lending practice that has come to be known as "extend and pretend." more

Federal Reserve Weighs In on CRE

2011-03-01T07:20:00.000-08:00

Testimony of Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation

Before the Congressional Oversight Panel, Washington, D.C.

February 4, 2011

Chairman Kaufman, members of the Congressional Oversight Panel, thank you for your invitation to discuss the current state of commercial real estate (CRE) finance and its relationship to the overall stability of the financial system. Since the panel published its report, Commercial Real Estate Losses and the Risk to Financial Stability, one year ago, the rate of deterioration in market and credit conditions has leveled off, and there are some early signs of price stabilization in a number of key markets. Nonetheless, CRE delinquencies and losses are expected to remain elevated for some time.

Weakness in real estate markets, both commercial and residential, continues to be a drag on overall growth in the economy. Construction of nonresidential structures continues to lag because of weak fundamentals in the sector, including high vacancy rates and low property values, factors that are unlikely to change in the near term. Similarly, new home construction is likely to be constrained by the continuing overhang of distressed and vacant homes.

CRE-related issues also present ongoing problems for the banking industry, particularly for community and regional banking organizations. Losses associated with CRE, particularly residential construction and land development lending, were the dominant reason for the high number of bank failures since the beginning of 2008, and further CRE-related bank failures are expected over the next few years.

Credit losses for bank CRE loans typically continue well past the trough of recessions, and we expect this pattern to continue in this cycle. Working through the large volume of troubled CRE loans will take time as banks go through the difficult process of loan workouts and loan restructurings. If done prudently and effectively, including allocating appropriate levels of reserves and capital, loan restructuring can reduce the ultimate losses to the banking system. In addition, proper restructuring can reduce the damage done to businesses and the economy by limiting the forced liquidation of commercial properties that would further depress prices.

While we expect significant ongoing CRE-related problems, it appears that worst-case scenarios are becoming increasingly unlikely. CRE portfolio loan concentrations are not a significant risk factor for systemically important financial institutions. Some systemically important financial institutions have substantial exposures to commercial mortgage-backed securities (CMBS) and to derivatives securities such as CRE collateralized debt obligations. However, risks in these areas have been reduced, as significant mark downs have already been taken on these securities. In addition, conditions in the CMBS market have been improving, with spreads tightening and some new deals coming to market. However, we see losses in CRE to be an ongoing negative factor in bank portfolios that will need to be worked through over the next several years.

Current Conditions in the Commercial Real Estate Market
As housing market conditions deteriorated sharply throughout 2007, CRE markets began to experience weakness. Broad CRE market conditions remained relatively healthy until the second half of 2008, when CRE performance metrics turned down rapidly as a result of severe financial market disruptions and accelerating job losses. Vacancy rates increased sharply, rental rates plummeted, and property sales and values declined substantially. The higher vacancy rates and declines in the values of existing properties placed particularly heavy pressure on construction and development projects, which depend on market conditions at the time of completion for absorption and thus repayment.

Underlying market fundamentals of CRE remain a significant concern, but they have shown some signs of stabilizing. For instance, vacancy rates on office, industrial, and retail properties have stopped increasing, although they remained at elevated levels at the end of 2010, ranging between 13 percent and more than 16 percent, depending upon the property type and location. These levels are, on average, 5 to 6 percentage points above levels experienced in 2007. The rate of decline in rental rates has also slowed. At the beginning of 2010, office and industrial rental rates were between 10 and 12 percent lower than a year earlier, on average, but declines had slowed to between 5 and 7 percent at an annual rate at the end of the year. Sales volume of CRE properties improved each quarter during 2010, accumulating to almost $135 billion for the year as a whole. ¹ This total is double the CRE property sales volume for all of 2009.

Recent readings from CRE price indexes indicate that the rate of price declines has slowed substantially. The NCREIF Transactions Based Index fell more than 36 percent from its peak in the second quarter of 2007 to the first quarter of 2010. In contrast, the index indicated that prices as of the third quarter of 2010 were only 0.2 percent lower than they were at the beginning of the year. However, the degree of price stabilization across different types of properties and locations is uneven. In particular, demand has been rebounding for well-occupied properties in top-tier markets, while less desirable properties in less favorable markets are still struggling from a lack of demand.

Concentrations of CRE Exposure on Bank Balance Sheets
At the end of the third quarter of 2010, approximately $3.2 trillion of outstanding debt was associated with CRE, including loans for multifamily properties. Of this amount, about one-half, or $1.6 trillion, was held on the balance sheets of commercial banks and thrifts. An additional $700 billion represented collateral for CMBS, and the remaining balance of $900 billion was held by a variety of investors, including pension funds, mutual funds, and life insurance companies. Outstanding CRE debt has contracted 6 percent from its peak in 2008, while outstanding CRE loans at banks have contracted by almost 12 percent. The majority of the decrease in bank loans was associated with reductions in construction and development loan balances, which were largely the result of foreclosures and charge-offs.

Despite the decline in aggregate CRE loans at commercial banks, many banks still have CRE loan concentrations, as defined in the 2007 "Interagency Guidance on Concentrations in Commercial Real Estate."² Banks are considered to have a CRE concentration when loans for construction, land development, and other land exceed 100 percent of risk-based capital or total CRE is greater than 300 percent of risk-based capital.³ By this definition, almost 1,200 commercial banks, or 18 percent of all banks, had CRE concentrations at the end of the third quarter of 2010. CRE concentrations have been the dominant factor in bank failures. Of the more than 300 commercial banks and thrifts that have failed since the beginning of 2008, more than three-fourths had CRE concentrations at year-end 2007.

Notably, CRE concentrations are not a significant issue at the largest banks. Among banks with total assets of $10 billion or more, 10 percent had CRE concentrations. In contrast, one-third of all banks with assets between $1 billion and $10 billion had CRE concentrations. For banks with less than $1 billion in assets, approximately 17 percent had CRE concentrations.

Credit Quality of Commercial Real Estate in Bank Portfolios
At the end of the third quarter of 2010, almost 10 percent of CRE loans in bank portfolios were considered delinquent, a three-fold increase since the end of 2007. ⁴ Not surprisingly, loan performance problems have been most striking for construction and development loans, especially for those that finance residential development. Almost 19 percent of all construction and development loans were considered delinquent at the end of the third quarter of last year.

During 2010, delinquency rates on construction and development loans began to improve slightly, falling 1 percent in the first three quarters of 2010. Additionally, delinquency rates on loans backed by existing nonfarm, nonresidential properties leveled off in 2010. Still, even if CRE delinquency metrics continue improving, there remains a sufficiently large overhang of distressed CRE at commercial banks such that loss rates for this portfolio will likely stay high for some time and many banks with CRE concentrations will remain under stress.

Approximately one-third of all CRE loans (both bank and non-bank), totaling more than $1 trillion, are scheduled to mature over the next two years. This circumstance represents substantial refinancing risk as CRE loans typically have large balloon payments due at maturity. Banks have been dealing with maturing loans in a variety of ways, including providing extensions of performing assets, troubled debt restructurings, equity injections, collateral sales, and, in some cases, pursuing foreclosures. Since the issuance of the October 2009 supervisory guidance on prudent loan workouts, banks have significantly increased the level of restructuring of CRE loans.⁵ Economic incentives to restructure or refinance existing loans are aided by the current low interest rate environment. Some banks with properties in healthier markets are also beginning to see a pick-up in investor demand for high-quality properties with strong tenants.

Since the beginning of 2008 through the third quarter of 2010, commercial banks have incurred almost $80 billion of losses related to CRE exposure, equating to a little over 5 percent of the average exposure outstanding during this time. In past cycles, CRE credit and market fundamentals generally lagged the larger economy by a year or more. Given this historical experience and the recent improvement witnessed in the broader economy, it is estimated that banks have taken roughly 40 to 50 percent of the CRE losses that they will realize over this cycle. Using past cycles as a guide, we expect that the remaining losses will likely be incurred over the next few years.

While we can project potential losses facing banks, losses ultimately realized through this cycle will depend on the pace of improvement in the labor market, overall credit availability, and other macroeconomic and financial factors, especially unemployment rates and interest rates. Those factors are why we continue to emphasize the importance of stress testing as a critical element of managing risks associated with CRE concentrations.

Federal Reserve Supervisory Approach to Commercial Real Estate Concentrations
As noted in our previous statement to the panel on CRE conditions, the Federal Reserve led an interagency effort to develop supervisory guidance on CRE concentrations that was finalized in 2006 and published in the Federal Register in early 2007. ⁶ In that guidance, we outlined our expectations that institutions with concentrations in CRE lending need to perform ongoing assessments to identify and manage concentrations through stress testing and similar exercises to identify the impact of adverse market conditions on earnings and capital.

Since the quality of CRE loans at supervised banking organizations began to weaken, the Federal Reserve has devoted significant additional resources to assessing the quality of CRE portfolios. These efforts include monitoring the impact of changing cash flows and collateral values, as well as assessing the extent to which banks have been complying with our CRE guidance. Examiners have taken a balanced approach to ensuring that banks are recognizing losses in a timely manner, maintaining sufficient loan loss reserves, and monitoring collateral values while being mindful not to discourage healthy banks from making loans available to creditworthy borrowers.

Additionally, in an effort to encourage prudent CRE loan workouts, especially among maturing loans, the Federal Reserve led the development of interagency guidance issued in October 2009 regarding CRE loan restructurings and workouts.⁷ To better understand the effectiveness of this guidance, the agencies conducted a survey of financial institutions during their examinations. The survey was completed in the third quarter of 2010.

The survey was designed to gain an understanding of the current trends in the institution's CRE portfolios and an estimation of the volume of loan restructurings that are likely to occur within the next year. The majority of respondents described the quality of their CRE portfolios as relatively stable but expressed concern regarding borrowers' deteriorating repayment abilities and declining collateral values, which were of particular concern where maturing loans no longer met the institution's underwriting standards. Approximately two-thirds of the respondents were engaged in workout activity. Of note, respondents reported that almost three-fourths of loan modifications were performing according to their modified terms. The survey also noted that the volume of future CRE workouts was estimated to increase by approximately 60 percent during 2011. In contrast, banks have only restructured approximately 5 percent of all outstanding CRE portfolios to date.
Given the level of restructured loans to date and the estimated volume of future restructurings, the Federal Reserve will continue to review institutions' restructuring policies to ensure that modifications are pursued in a prudent manner. Moreover, examiners will also monitor banks' internal reporting systems to determine if restructured loans are performing in accordance with modified terms.

Regulated institutions continue to face significant challenges in determining the value of real estate in the current environment. For this reason, the Federal Reserve and the other federal banking agencies issued revisions to the Interagency Appraisal and Evaluation Guidelines in December 2010.⁸ The Federal Reserve expects institutions to have policies and procedures for obtaining new or updated appraisals as part of their ongoing credit reviews. An institution should have appraisals or other market information that provide appropriate analysis of the market value of the real estate collateral and reflect relevant market conditions, the property's current "asis" condition, and reasonable assumptions and conclusions.

Changes to Supervision at the Federal Reserve
To improve both the Federal Reserve's consolidated supervision and our ability to identify potential risks to the financial system, we have made substantial changes to our supervisory framework. We have augmented our traditional supervisory approach, which focuses on examinations of individual firms, with greater use of horizontal reviews, which simultaneously examine portfolios across a group of firms, to identify common sources of risks and best practices for managing those risks. To supplement information from examiners in the field, we have enhanced our quantitative surveillance program to use data analysis and formal modeling to help identify vulnerabilities at both the firm level and for the financial sector as a whole. This analysis is supported by the collection of more timely, detailed, and consistent data from regulated firms. Many of these changes draw on the 2009 Supervisory Capital Assessment Program, or SCAP.

Regarding CRE exposures specifically, we are working with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation on the collection of loan-level CRE data from a number of national and regional banks. The data collected will provide critical information on the credit quality and performance of these loan portfolios. These data will aid in the development of more forward-looking loan loss projections that will provide a useful benchmark for the broader CRE market that can be used for all institutions. They will also be used to develop more accurate stress test parameters for CRE portfolios of banks that the Federal Reserve supervises. In addition, the agencies have made adjustments to the Consolidated Reports of Condition and Income, or the Call Report, filed quarterly by banks, to obtain more detailed information with respect to their CRE restructurings.

Conclusion
Over the past year, CRE market and credit conditions have shown signs of stabilization and, in some areas, modest signs of improvement. We are also seeing signs of price stabilization in a number of CRE markets. Nevertheless, while some directional metrics are improving, the CRE market is still distressed and the strength and pace of improvements remains uneven.

We expect that banks will continue to incur substantial additional CRE losses over the next two years and that many banks with CRE concentrations will continue to be under stress. While problems in the CRE market will be an ongoing concern for a number of banking organizations and a negative factor for economic growth and lending, we do not see CRE losses as a threat to systemically important financial institutions.

Progress on working through the overhang of distressed CRE will take time and will depend on banks taking strong steps to ensure that losses are recognized in a timely manner, that loan loss reserves and capital appropriately reflect risk, that loans are modified in a safe and sound manner, and that loans continue to be made available to creditworthy borrowers. To this end, the Federal Reserve will continue to work with lenders to ensure that bank management and supervisors take a balanced approach to ensuring safety and soundness and serving the credit needs of the community.

Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation

SBA Mortgage Relief Program to Small Businesses

2011-02-21T15:37:00.000-08:00

Release: Congresswoman Jackie Speier Announces SBA Mortgage Relief Program to Small Businesses

02/18/11 SAN MATEO, CA- Congresswoman Jackie Speier (D-San Francisco/San Mateo) today announced that the Small Business Administration is offering a program that will help small businesses facing maturity of commercial loans or balloon payments refinance their mortgage debt.

“This is a lifeline to businesses at a time when our economy is starting to recover,” Speier said. “This program could keep business owners out of foreclosure who are making their payments on time and are doing well.”

The temporary program will permit business owners to use a version of SBA’s 504 loan program to refinance mortgage loans that would mature before December 31, 2012. Applications will be accepted starting February 28, 2011 until September 27, 2012.

Congress authorized the SBA to approve $15 billion in loans under this program, $7.5 billion this year and $7.5 billion in 2012. SBA estimates that the program will benefit up to 20,000 businesses in the U.S., up to 5000 of them in California.

Traditional 504 loans are long-term financing tools designed to encourage economic development by offering small businesses fixed-rate financing to acquire major fixed assets for expansion and modernization. The business owner has to commit to at least 10% equity and work with a third-party lender and an SBA-approved Certified Development Company on a standard 50% /40% split. Under the temporary program, the business is not required to expand to qualify for a loan modification.
Business owners can refinance up to 90% of the current appraised property value or 100% of the outstanding mortgage, whichever is lower.

The SBA may later expand the program to businesses with balloon payments due after December 31, 2012

Find a Fact Sheet about 504 Loan Refinancing For Eligible Small Business Assets Under the Jobs Act here.

Commercial Real Estate News

2011-02-11T09:15:00.001-08:00

A New Paradigm For Distressed Construction Assets
by Marc Metzgar, Feb. 7, 2011
In the past decade, construction lending has been a metaphoric study of the lending industry as a whole. It was a perfect storm, where experience and best practices became subordinate to production. In many ways, risk mitigation in construction lending followed the same fate as risk mitigation in residential lending. The fact that a construction loan was underwritten based [read more]

$74.8B In Real Estate Auctions During 2010
Feb. 10, 2011
Real estate auctions accounted for $74.8 billion in sales during 2010, according to a new estimate by the Gwent Group, based in Bloomington, Ind. The figure includes live sales, government sales, estate and private "boardroom" sales, sealed bid auctions [read more]

DebtX Reports December Drop In CRE Loan Prices
Feb. 9, 2011
The aggregate value of commercial real estate (CRE) loans priced by Boston-based DebtX that collateralize commercial mortgage-backed securities (CMBS) decreased to 79.4% as of Dec. 31, 2010, from 80.3% as of Nov. 30, 2010. Loan values were 75.9% as [read more]

Blackstone Takes Majority Stake Of Hotel Del Coronado
Feb. 8, 2011
Strategic Hotels & Resorts Inc., headquartered in Chicago, has closed a definitive agreement to recapitalize the joint venture that owns the Hotel del Coronado, one of California's most famous luxury resorts. Under the terms of the transaction, a new [read more]

MBA: CRE Originations Up 36% In 2010
Feb. 8, 2011
Mortgage bankers originated $110 billion of commercial and multifamily mortgages during 2010 - an increase of 36% from 2009 - according to preliminary estimates based on the Mortgage Bankers Association's (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. The [read more]

MBA Ranks Top Commercial, Multifamily Mortgage Servicers
Feb. 7, 2011
The Mortgage Bankers Association (MBA) released its year-end ranking of commercial and multifamily mortgage servicers as of Dec. 31, 2010. At the top of the list is Wells Fargo, with $451.1 billion in U.S. master and primary servicing, followed [read more]

Commercial Real Estate Creeping Slowly Toward Recovery
Feb. 4, 2011
Although the commercial real estate sector is showing hints of stabilization, a full recovery is still far away, regulators and analysts say. In a hearing Friday, the Congressional Oversight Panel (COP), a federal watchdog agency, examined the impact of [read more]

Freddie's Multifamily Volume Picked Up In Second Half Of 2010
Feb. 4, 2011
Freddie Mac reports that the volume of its multifamily whole-loan and bond guarantee business totaled $15 billion last year - down from almost $17 billion in 2009. This volume includes Freddie Mac's targeted affordable-housing products, which finance apartments that [read more]

Despite New Issuances, CMBS Delinquency Rate Hits Another Record High
Feb. 2, 2011
The U.S. commercial mortgage-backed security (CMBS) rate rose again in January, with the percentage of loans 30 or more days delinquent, in foreclosure or real estate owned climbing 14 basis points (bps) to 9.34%, Trepp LLC reports. That is [read more]

Fannie Mae Delivers New Multifamily MBS Product
Feb. 2, 2011
Fannie Mae has introduced Guaranteed Multifamily Structures (Fannie Mae GeMS), an expanded multifamily mortgage-backed securities (MBS) execution that will include DUS Megas, DUS REMICs and syndicated DUS Megas. Syndicated Mega deals will be managed by broker-dealers and offered in [read more]

Morgan Stanley And B Of A To Issue CMBS
Feb. 2, 2011
A second commercial mortgage-backed securities (CMBS) deal has hit the market this week, The Wall Street Journal reports. The $1.55 billion issuance is being put forth by Morgan Stanley and Bank of America. Earlier this week, the WSJ reported [read more]

Survey Finds CRE Markets Mending Slowly
Feb. 2, 2011
The Real Estate Roundtable, fresh off its 2011 State of the Industry Meeting last week, says its 1st Quarter 2011 Real Estate Roundtable Sentiment Index shows the most positive results since the survey of senior commercial real estate (CRE) [read more]

Deutsche Bank, UBS To Offer $2.2B CMBS
Feb. 1, 2011
Deutsche Bank and UBS are planning to issue the year's first commercial mortgage-backed security (CMBS) offering, a $2.2 billion bond offering. The Wall Street Journal reports that the bond consists of seven tranches, including three that are AAA-rated. The [read more]

Fed: More Demand, Less Funds For CRE Loans
Feb. 1, 2011
Approximately 10% of U.S. banks have reported an increased demand for commercial real estate (CRE) loans, the strongest reading since early 2006, according to the Federal Reserve Board's January 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices. [read more]

Investor Consortium Acquires FDIC Structured Transaction
Jan. 28, 2011
A consortium of investors organized by Colony Capital LLC, including Colony Financial Inc., a real estate finance company focused on acquiring, originating and managing commercial mortgage loans, has participated in the acquisition of a structured transaction with the Federal [read more]

Cantor Fitzgerald Plans $1B CMBS Offer
Jan. 27, 2011
New York-based bond broker Cantor Fitzgerald LP is planning a $1 billion securities offering tied to commercial property loans. According to a Bloomberg report, the offering is the first for the company, which began its real estate finance [read more]

Commercial Modification News

2011-01-26T14:51:00.003-08:00

What Is Loan Audit Commercial? | ROCKY POINT REAL ESTATE 1
A loan audit commercial may be applied to any forms of loan modification, including industrial loan mods, warehouse loan modifications and a lot more. ...
www.rockypointrealestate1.com/what-is-loan-audit-commercial/

The Benefits Of Hiring A Commercial Mortgage Broker
A good commercial mortgage broker has the option to shop hundreds of lenders ... Shocking Facts Nobody Dares to Tell About Obama's Loan Modification Plan! ...
ezinearticles.com/?The-Benefits-Of-Hiring-A...Broker...

Taking Commercial Loan Modification To Avoid Property Foreclosure ...
Commercial loan modification may help commercial property owners avoid foreclosure. With the real estate crisis affecting real estate owners, ...
arizona-first-time-homebuyer.com/?p=6

Commercial Loan Solutions Files Complaints Against Lenders
Tags, : commercial loan modification, commercial mortgage modification. Last Updated, : Jan 25, 2011. Shortcut, : http://prlog.org/11248429 ...
www.prlog.org/11248429-commercial-loan-solutions-files-co...

Maximizing Profits In Distressed Commercial Real Estate

2010-12-16T13:56:00.000-08:00

In 2008, Commercial Equity Solutions (CES) began to negotiate with lenders at the request of their clients who own commercial real estate. Their commercial property (or real estate portfolio) was under attack.

With the economic fallout most investment real estate began to experience higher and higher vacancy rates. The owners were forced to lower leasing rates to retain quality tenants or had lost the less credit worthy tenants altogether. The Commercial Real Estate (CRE) investors were no longer able to sustain the debt service and asked CES to contact their bank to find a solution to their dilemma.

After hundreds of client interviews, property reviews and confidential bank negotiations, CES has utilized the applied theory of consultation and negotiation in commercial real estate workouts to observe a significant void in the current market: knowing where and how to acquire commercial real estate at its maximum profit delta.

This discovery has expanded the focus of our commercial real estate consulting practice from strictly a property owner as client to an acquisition investor as client perspective.

By helping property owners achieve a significantly discounted loan payoff opportunity, they are assisting the banks in removing non-performing debt from their books. This creates an opportunity for an investment client and allows the property owner to reset the basis of their property, setting the table for investors to acquire, or become part of, stable cash flowing real estate throughout the United States.

Of course this all happens prior to foreclosure, before these real estate opportunities are known to the general public.

Most CRE investors understand that once a property has been foreclosed upon, the bank is not going to be as amiable in selling at the best possible price. Additionally, the previous owner may have been the best financial steward that property has seen, but due to outside forces, not their management skills, the property lost its sustainability.

Now as a bank owned property, it will lose further value as tenants flee to a more secure or better priced property. Acquiring or becoming an equity partner prior to these negative consequences is where CES has answered investor’s liquidity and risk concerns.

The maximization of cash flow, sustainability, risk reduction, and profitability (not to mention the altruistic aspects of assisting a neighborhood or an entire community to take a step back towards stabilization and security), is the sweet spot most investors are looking for.

CES has now taken the next step by releasing an investor driven and directed marketing approach to acquire the specific property type, the location, and risk level investors are looking for. This program allows investors to initiate their chosen market and demographics and have the first look at properties that meet these criteria.

This program provides targeted properties negotiated through the CES system that will maximize investor profits in distressed commercial real estate. Contact a member of our team today to find out how you can leverage our experience and contacts to expand your commercial real estate portfolio.

Larry Larsen
Director of Client Services
Commercial Equity Solutions, LLC
888-807-2786

The Proper Care and Feeding of Bankers

2010-10-13T09:37:00.000-07:00

When engaging a banker for the purpose of a commercial mortgage workout, your success will be in direct proportion to your understanding of what motivates your banker. Understanding who your lender is and what their motivations are is essential to negotiating a workout.

The different types of lenders that you could encounter include, large national banks, community and regional banks, CMBS special servicers and structured sale buyers that originate when the FDIC takes over a bank.

A large national bank who may be trading on the stock market at less than book value because of unrealized CRE losses may be more apt to recognize a loss in exchange for a quick resolution as they are trying to clean up their balance sheet. The small community bank may be in a position that they can't afford to realize a loss and might be more apt to "pretend and extend". In this case, it may be likely that three months from now you may be dealing with a completely different set of circumstances as the smaller banks get gobbled up or closed by the FDIC.

If the loan is with a CMBS special servicer, you must take into consideration that the special servicer usually gets 1% of what they collect and all of the default interest. They also hold the first loss position tranche of the securitized note. The special servicer will allow the broader investor pool to take the property through foreclosure rather than forfeit the default interest and other fees that are called for in the serviceing agreements.

A structured sale buyer is a bank that acquired a portfolio of loans from the FDIC when they took over a bank. These lenders often paid pennies on the dollar to take over what are considered toxic assets. These lenders are looking to maximize their investment and may be interested in acquiring the property itself through foreclosure.

Which ever of these lenders owns your note, it is important that you communicate with them. Bankers hate surprises. They all fall somewhere on the banking food chain and have to answer to someone. Understanding who they have to answer to and what their motivations are will help you to formulate a workout plan that meets their goals. Only the lender can approve a workout.

You must have patience with your lender. There are three distinct stages the lender goes through when there is a problem on a loan. the first stage is denial. "Just keep sending your payments, no problem". Then comes anger. "I'll sue!" Next is acceptance. Your lender understands that the problem is real and needs to be addressed. This is where you get a workout. Each of these stages must be dealt with. You can't skip ahead and these can't be accomplished in the first few meetings.

Bankers like documentation. When you see things are getting bad, talk to the lender and give him supporting documentation. Let him know what you are up against so that he isn't surprised if you miss a balloon or interest payment.

By Ted Schmidt, Director of Marketing
Commercial Equity Solutions, LLC

Recent Successes Negotiating with Lenders

2010-09-10T11:57:00.001-07:00

Some of our more recent and more sophisticated clients have had success negotiating effectively with their lenders. This scenario is more likely to happen where there is not a personal guarantee or where the borrower is not financially collectible to the lender for deficiencies. These clients have been able to convince the lender that it is in everyone's best interest to agree on a discounted payoff "DPO". This allows the lender to remove the note off their books and make the necessary regulatory adjustments.

Once this number is agreed to, the borrower then must perform within a limited time period to either refinance or pay off the lender to consummate the deal. It also allows the borrower to reset the basis on a new loan that will cash flow. We are assisting these new clients, performing on the negotiated DPO's.

The process of obtaining new financing, especially where the commercial lending market is already very limited, and where most borrowers are not able to come up with the normal 30 - 40% down payment can be extremely challenging. We have been able to attract lenders and investors that understand this difficult situation and are willing to lend or invest in this environment. It is important that any commercial borrower that is working through this situation understands the importance of seeking professional assistance in this process. The DPO may create a taxable event and consultation with a qualified CPA is not a bad idea. Failing to take advantage on the negotiated DPO can be very expensive to both the lender and the borrower.

We also have clients that have already lost their property to foreclosure and would like to make an offer to the lender to purchase the property back from the lender REO department. These clients also require financing or an investor partner to accomplish this purchase. Seeking the assistance of a professional that understands the challenges associated with this process can save time and money.

We find that working through these ever changing markets conditions is a challenge to all of us. Particularly in commercial real estate, no two properties are the same, and each transaction must stand up to the merits of the deal. Understanding the moving parts and the motivation of each affected party is key to achieving success for each workout.

For additional information or comment please contact the author:

Chuck Matheny 602.697.7904

chuck@commercialequitysolutions.com

Strategic Defaults in Commercial Real Estate

2010-09-02T09:58:00.000-07:00

By, Dr. Ted C. Jones, Economist Stewart Title

Latest NCREIF Data Show an Improvement in Commercial Real Estate Values in Q2

With an estimated $1.4 trillion of commercial real estate debt set to refinance by the end of 2014, more than half of that is underwater according to a Wall Street Journal article.
Good news, however, is an improvement in the just released Q2 2010 MIT Real Estate Group’s analysis of The National Council of Real Estate Investment Fiduciaries (NCREIF) data. NCREIF is a not-for-profit trade association that provides data and analysis to the pension fund industry. They track returns and prices and have more than $234 billion of value in 6,066 income producing properties. Since these properties are held by pensions funds or retirement accounts, there no tax implications whatsoever.

Rather than using comparable sales, MIT produces what is similar to S&P’s Case-Shiller House Prices Indices, but for commercial real estate. Rather than examining comparable sales and imputing that to other property values, these indices are based on a sale of a previously acquired property.

The table below shows the typical property value change since the time of acquisition. The good news is that for the first time since 2007, property values did not track down further in value. Bad news is that essentially, if a property was acquired since 2004 (but not in the last two or three quarters) it likely is worth the same or significantly less, depending on the date of acquisition. In the table below, for example, an industrial property acquired in Q3 2007 is now worth almost 44 percent less than the purchase price. Depending on the property type, acquisitions at the market peak in 2007 are now worth from 27.7 percent to 43.6 percent less than the purchase price.

You need to note that MIT states “results for the 1st, 2nd, and 3rd quarters of any year are considered preliminary and subject to revision until the calendar year is completed with the 4th quarter results.”

Maybe the light at the end of this tunnel is not yet another train. And these days good news in real estate has been tough to find.

Commercial Equity Solutions, LLC assists real estate owners in all aspects of their commercial real estate and have successfully assisted and counseled borrows to work with their lenders to modify their commercial loans and mitigate personal and corporate liability.

Commercial Property Owners Choose to Default- WSJ article
For more info on these price data see MIT Real Estate Group’s analysis of NCREIF data.

Recent Commercial Modification Success Stories

2010-08-12T10:42:00.000-07:00

Thrift Store Gets A 2 Year Extension

In February of this year a retail store owner in Glendale, AZ approached us and asked if we would be able to help save their store. The store provides jobs for battered woman and the profits go to support battered woman's shelters. They were just 2 weeks from the sale date when they engaged Commercial Equity Solutions, LLC to help.

They had become delinquent on their taxes and could not keep up on the payments. Previously, the property owner had attempted to negotiate an extension and got nowhere until they retained Commercial Equity Solutions, LLC.

By demonstrating to the lender that the stores income had stabilized over the last few quarters, the lender agreed to a 2 year extension with interest only payments.

110,000 Square Foot Retail Center Gets Principal Reduction.

This multi-tenant retail property in Minnesota has had a high turnover rate because of constant retail lease renegotiation. The property owners were unable to keep current on the taxes and soon became delinquent on the debt service.

The lender (a CMBS Trust) turned the account over to a special servicer and began foreclosure proceedings on the $9.4 million note. Commercial Equity Solutions, LLC was successful in negotiations with the servicer and they agreed to a pay off of $5.5 million.

With the loan basis on the property reset to its market value, this shopping center will once again cash flow sufficiently to service the new debt.

Recent Commercial Modification News

2010-07-08T09:10:00.001-07:00

To Fix Sour Property Deals, Lenders 'Extend and Pretend'

Wall Street Journal - Carrick
Mollenkamp - Lingling
Wei

But the practice is creating uncertainties about the health of both
the commercial-property market and some banks. The concern is
that rampant modification
...

Fitch
Takes Various Actions on Bear Stearns Commercial Mortgage

Trading Markets (press release)
- 1 day ago

... modified and the borrower is performing under the terms of
the modification. ... Similar to Fitch's prospective
analysis of recent vintage commercial ...

Fitch
Downgrades GMAC Commercial Mortgage Securities 2001-C1
...? - Earthtimes
Fitch
Takes Various Actions on Nomura Asset Securities Corp. 1998-D6? - Benzinga
all
99 news articles »

Fitch
Affirms Protective Life Insurance Co.'s CMBS Servicer Ratings
MarketWatch (press release) - Jun 15, 2010
The servicer ratings are based on the methodology
described in Fitch's reports 'US Commercial Mortgage Servicer Rating
Criteria' dated June 19, 2009, ...
The
role of mortgage servicers? - Financial Times
The
role of mortgage servicers? - Financial Times
Fitch
Affirms Halliburton's IDR at 'A-'; Outlook Stable? -
Bradenton Herald
all
29 news articles »

BERNANKE ON COMMERCIAL REAL ESTATE

2010-06-09T12:04:00.000-07:00

BERNANKE ON COMMERCIAL REAL ESTATE
"We are concerned about it, it clearly is a very weak point in the economy. For many banks, including small and medium-sized banks, it is a problem. We have done a number of things. The Federal Reserve, working with the Treasury, has developed programs to try to restart the commercial mortgage-backed securities markets. Beyond that we have issued guidance to banks on commercial real estate and we're trying to work with them to restructure commercial real estate loans and to find ways to manage in terms of loans, so we're doing the best we can with banks and with the markets. There seems to be, I would say, a few glimmers of hope in this area, some stabilization of prices in some markets, for example, but it does remain a serious concern and we're watching it very carefully."

Commercial Loan Workouts and Modifications

2010-04-04T12:03:00.000-07:00

By Chuck Matheny

Commercial Equity Solutions, LLC

Many commercial borrowers now find themselves in the same condition today that a significant majority of homeowners are in. These commercial borrowers have negative equity or in other words their loan is greater than the value of their property. What is worse is that often the income from the property is not sufficient to pay the monthly debt service and taxes due on the property. This poses a problem when it comes to the end of the term of the loan and a refinance or extension is necessary. It also causes a more immediate problem of how will the commercial borrower pay the monthly loan and tax obligations.

This situation has evolved in most cases for two reasons; 1) the economy has caused many business’s to downsize or disappear thus causing increased vacancies and 2) due to the soft market many tenants have requested rent reductions from their landlord to help keep them in business and landlords have voluntarily granted them as it is most often in their best interest.

This situation leaves many commercial property owners in the tenuous situation of having to”feed the property” or support the monthly loan obligations while the property cannot sustain itself. At some point many owners have to determine if it is worth trying to hang on to their properties. The question that is often asked is do I want to keep spending good money after bad in this particular investment.

The lenders on the flip side are having no choice but to send out default notices if the payments due are past 30 days. If the lender feels that deficiencies are not curable and that the property is not being managed properly many will initiate some kind of foreclosure action and attempt to take the property back or at the very least appoint a receiver.

The good news in this scenario is that commercial lenders are realizing that it is often in their best interest not to aggressively pursue a foreclosure action. Often a better action is to modify on a temporary basis the terms of the note. Sometimes this can be done with the shortfall being forgiven by the lender. Some lenders are under such heavy regulatory pressure that the best solution is simply to move the note off their books through a short sale or short refinance. This can often be done where the lender will realize more than would come from a foreclosure. One key component in determining the best course of action for both lender and borrower is an accurate measure of the current value of the property. This is not an easy task where many of the comparables typically used in a valuation or appraisal are a balance between foreclosure sales and legitimate investor income or capitalization rate based sales. This value becomes a moving target. This is also one reason why appraisal firms are so busy. Values are changing monthly and have a wide range of variance.

If a short refinance is pursued as a course of action since the traditional commercial finance markets are so tight the best alternative is often private financing. This adds a whole new dimension of complexity to the process. Borrowers may even have to give up future equity to accomplish this short refinance with a private lender.

The other significant question that bears weight in the decision of what to do is the level of personal guarantees associated with the particular property. In many commercial properties, ownership involves multiple partners and this further complicates the situation. If some of the partners are not able to make necessary cash calls you can imagine the stress that is created.

Many borrowers would be well advised to get professional help in trying to make these difficult decisions, as there is usually significant equity at risk. Find someone that you feel will take the time to get familiar with the details of your commercial property. Also take the time to find someone that will understand the different values that your property will have in this distressed market. Finally, find a professional that will not be too pushy or adversarial with your lender as they are not obligated to do what the borrower desires to accomplish. Remember we are working for the most part in uncharted waters for both borrower and lender and no one knows how long these distressed market conditions will continue.

Commercial Loan Modification Article in National Mortgage Professional Magazine

2010-03-16T08:32:00.000-07:00

Please read the following article I wrote for National Mortgage Professional Magazine.
"Commercial Loan Modification"

Record CMBS Delinquencies Reported by Realpoint

2010-03-03T07:06:00.000-08:00

Realpoint released their Monthly Delinquency Report. Here are some highlights and charts from their 15 page report.

In January 2010, the delinquent unpaid balance for CMBS increased by another $4.3 billion, up to $45.94 billion from $41.64 billion a month prior. The overall delinquent unpaid balance is up 326% from one-year ago (when only $10.79 billion of delinquent unpaid balance was reported for January 2009), and is now over 20 times the low point of $2.21 billion in March 2007. The distressed 90+-day, Foreclosure and REO categories grew in aggregate for the 25th straight month – up by $7.42 billion (28%) from the previous month and over $27.95 billion (508%) in the past year (up from only $5.51 billion in January 2009). This included a substantial jump in 90+-day delinquency in January 2010.

CMBS Delinquency Amounts

CMBS Delinquency Percentages

All deals seasoned at least a year have a total unpaid balance of $789.07 billion, with $45.94 billion delinquent – a 5.82% rate (up from only 3.15% six months prior).

Geography

The top three states ranked by delinquency exposure have remained consistent since January 2009, as California, Florida, and Texas collectively accounted for 30% of delinquency through January 2010.
The 10 largest states by delinquent unpaid balance reflect 57% of CMBS delinquency, while the 10 largest states by overall CMBS exposure reflect 52% of the CMBS universe.
The state of California remains a major concern at near 13% of CMBS delinquency. By MSA, however, such delinquency is concentrated in the Los Angeles, Riverside-San Bernardino, and Orange County MSAs highlighted below.
While by state delinquency exposure Florida ranks second, no Florida MSA is found in the Top 10 MSA’s ranked by delinquency exposure (highest being Miami, which ranked 14th in our data).
Notably, over 10% of total CMBS exposure in the states of Florida, Arizona, Nevada and Michigan are delinquent, with the Phoenix, AZ and Las Vegas, NV MSAs accounting for the top 2 by delinquency exposure at (14% and 14.5% of the MSAs, respectively).
Credit also appears to be deteriorating further in the Riverside-San Bernardino, CA MSA, as over 11% of the total MSA exposure was reported delinquent through January 2010.
Texas delinquency is highly concentrated within the Dallas-Fort Worth and Houston MSAs.
Only one MSA topped 4% of CMBS delinquency in January 2010, consistent with the prior month.
The 10 largest MSAs by delinquent unpaid balance reflect 30% of CMBS delinquency, while the 10 largest MSAs by overall CMBS exposure reflect 34% of the CMBS universe.

Video: How Will The CRE Bubble Be Resolved?

2010-03-02T08:07:00.000-08:00

Watch this interesting discussion on the commercial real estate crisis. Tom Flexner, head of real estate at Citigroup, and Richard LeFrak, president of the LeFrak Organization, talk to CNBC.

Billions in opportunistic private money remain on the sidelines as the large rift between buyers and sellers highlights the state of commercial lending.

Congressional Oversite Panel Issues Gloomy CRE Report

2010-02-23T09:18:00.000-08:00

The Congressional Oversight Panel issued its 190 page report on CRE . Find the executive summary below. The complete report is available at http://cop.senate.gov/documents/cop-021110-report.pdf

Executive Summary

Over the next few years, a wave of commercial real estate loan failures could threaten America’s already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation’s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present “underwater” – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.

The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010.

Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.

A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.

It is difficult to predict either the number of foreclosures to come or who will be most immediately affected. In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession.

Present Condition of Commercial Real Estate

The commercial real estate market is currently experiencing considerable difficulty for two distinct reasons. First, the current economic downturn has resulted in a dramatic deterioration of commercial real estate fundamentals. Increasing vacancy rates and falling rental prices present problems for all commercial real estate loans. Decreased cash flows will affect the ability of borrowers to make required loan payments. Falling commercial property values result in higher LTV ratios, making it harder for borrowers to refinance under current terms regardless of the soundness of the original financing, the quality of the property, and whether the loan is performing.

Second, the development of the commercial real estate bubble, as discussed above, resulted in the origination of a significant amount of commercial real estate loans based on dramatically weakened underwriting standards. These loans were based on overly aggressive rental or cash flow projections (or projections that were only sustainable under bubble conditions), had higher levels of allowable leverage, and were not soundly underwritten. Loans of this sort (somewhat analogous to “Alt-A” residential loans) will encounter far greater difficulty as projections fail to materialize on already excessively leveraged commercial properties.

Economic Conditions and Deteriorating Market Fundamentals

The health of the commercial real estate market depends on the health of the overall economy. Consequently, the market fundamentals will likely stay weak for the foreseeable future. This means that even soundly financed projects will encounter difficulties. Those projects that were not soundly underwritten will likely encounter far greater difficulty as aggressive rental growth or cash flow projections fail to materialize, property values drop, and LTV ratios rise on already excessively leveraged properties. New and partially constructed properties are experiencing the biggest problems with vacancy and cash flow issues (leading to a higher number of loan defaults and higher loss severity rates than other commercial property loans).

For the last several quarters, average vacancy rates have been rising and average rental prices have been falling for all major commercial property types.

Current average vacancy rates and rental prices have been buffered by the long-term leases held by many commercial properties (e.g., office and industrial). The combination of negative net absorption rates and additional space that will become available from projects started during the boom years will cause vacancy rates to remain high, and will continue putting downward pressure on rental prices for all major commercial property types. Taken together, this falling demand and already excessive supply of commercial property will cause many projects to be viable no longer, as properties lose, or are unable to obtain, tenants and as cash flows (actual or projected) fall.

In addition to deteriorating market fundamentals, the price of commercial property has plummeted. As seen in the following chart, commercial property values have fallen over 40 percent since the beginning of 2007.

For financial institutions, the ultimate impact of the commercial real estate whole loan problem will fall disproportionately on smaller regional and community banks that have higher concentrations of, and exposure to, such loans than larger national or money center banks. The impact of commercial real estate problems on the various holders of CMBS and other participants in the CMBS markets is more difficult to predict. The experience of the last two years, however, indicates that both risks can be serious threats to the institutions and borrowers involved.

Although banks with over $10 billion in assets hold over half of commercial banks’ total commercial real estate whole loans, the mid-size and smaller banks face the greatest exposure.

The current distribution of commercial real estate loans may be particularly problematic for the small business community because smaller regional and community banks with substantial commercial real estate exposure account for almost half of small business loans. For example, smaller banks with the highest exposure – commercial real estate loans in excess of three times Tier 1 capital – provide around 40 percent of all small business loans.

Foresight Analytics, a California-based firm specializing in real estate market research and analysis, calculates banks’ exposure to commercial real estate to be even higher than that estimated by the Federal Reserve. Drawing on bank regulatory filings, including call reports and thrift financial reports, Foresight estimates that the total commercial real estate loan exposure of commercial banks is $1.9 trillion compared to the $1.5 trillion Federal Reserve estimate. The 20 largest banks, those with assets greater than $100 billion, hold $600.5 billion in commercial real estate loans.

Figure 17: Commercial Real Estate Loans by Type (Banks and Thrifts as of Q3 2009)

As seen in the Foresight Analytics data above, the mid-size and smaller institutions have the largest percentage of “CRE Concentration” banks compared to total banks within their respective asset class. This percentage is especially high in banks with $1 billion to $10 billion in assets. The table above emphasizes the heightened commercial real estate exposure compared to total capital in banks with $100 million to $10 billion in assets. Equally troubling, at least six of the nineteen stress-tested bank-holding companies have whole loan exposures in excess of 100 percent of Tier 1 risk-based capital.

Risks

In the years preceding the current crisis, a series of trends pushed smaller and community banks toward greater concentration of their lending activities in commercial real estate. Simultaneously, higher quality commercial real estate projects tended to secure their financing in the CMBS market. As a result, if and when a crisis in commercial real estate develops, smaller and community banks will have greater exposure to lower quality investments, making them uniquely vulnerable.

As loan delinquency rates rise, many commercial real estate loans are expected to default prior to maturity. For loans that reach maturity, borrowers may face difficulty refinancing either because credit markets are too tight or because the loans do not qualify under new, stricter underwriting standards. If the borrowers cannot refinance, financial institutions may face the unenviable task of determining how best to recover their investments or minimize their losses: restructuring or extending the term of existing loans or foreclosure or liquidation.

On the other hand, borrowers may decide to walk away from projects or properties if they are unwilling to accept terms that are unfavorable or fear the properties will not generate sufficient cash flows or operating income either to service new debt or to generate a future profit.

Delinquent Loans

Although many analysts and Treasury officials believe that the commercial real estate problem is one that the economy can manage through, and analysts believe that the current condition of commercial real estate, in isolation, does not pose a systemic risk to the banking system, rising delinquency rates foreshadow continuing deterioration in the commercial real estate market. For the last several quarters, delinquency rates have been rising significantly.

The extent of ultimate commercial real estate losses is yet to be determined; however, large loan losses and the failure of some small and regional banks appear to some experienced analysts to be inevitable. New 30-day delinquency rates across commercial property types continue to rise, suggesting that commercial real estate loan performance will continue to deteriorate. However, there is some indication that the rate of growth, or pace of deterioration, is slowing. Unsurprisingly, the increase in delinquency rates has translated into rapidly rising default rates.

The increasing number of delinquent, defaulted, and non-performing commercial real estate loans also reflects increasing levels of loan risks. Loan risks for borrowers and lenders fall into two categories: credit risk and term risk. Credit risk can lead to loan defaults prior to maturity; such defaults generally occur when a loan has negative equity and cash flows from the property are insufficient to service the debt, as measured by the debt service coverage ratio (DSCR).

If the DSCR falls below one, and stays below one for a sufficiently long period of time, the borrower may decide to default rather than continue to invest time, money, or energy in the property. The borrower will have little incentive to keep a property that is without equity and is not generating enough income to service the debt, especially if he does not expect the cash flow situation to improve because of increasing vacancy rates and falling rental prices.

Broader Social and Economic Consequences

Commercial real estate problems exacerbate rising unemployment rates and declining consumer spending. Approximately nine million jobs are generated or supported by commercial real estate including jobs in construction, architecture, interior design, engineering, building maintenance and security, landscaping, cleaning services, management, leasing, investment and mortgage lending, and accounting and legal services.

Projects that are being stalled or canceled and properties with vacancy issues are leading to layoffs. Lower commercial property values and rising defaults are causing erosion in retirement savings, as institutional investors, such as pension plans, suffer further losses. Decreasing values also reduce the amount of tax revenue and fees to state and local governments, which in turn impacts the amount of funding for public services such as education and law enforcement. Finally, problems in the commercial real estate market can further reduce confidence in the financial system and the economy as a whole. To make matters worse, the credit contraction that has resulted from the overexposure of financial institutions to commercial real estate loans, particularly for smaller regional and community banks, will result in a “negative feedback loop” that suppresses economic recovery and the return of capital to the commercial real estate market. The fewer loans that are available for businesses, particularly small businesses, will hamper employment growth, which could contribute to higher vacancy rates and further problems in the commercial real estate market.

Conclusion

There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public. An extended severe recession and continuing high levels of unemployment can drive up the LTVs, and add to the difficulties of refinancing for even solidly underwritten properties. But delaying write-downs in advance of a hoped-for recovery in mid- and longer-term property valuations also runs the risk of postponing recognition of the costs that must ultimately be absorbed by the financial system to eliminate the commercial real estate overhang.

Any approach to the problem raises issues previously identified by the Panel: the creation of moral hazard, subsidization of financial institutions, and providing a floor under otherwise seriously undercapitalized institutions.

There appears to be a consensus, strongly supported by current data, that commercial real estate markets will suffer substantial difficulties for a number of years. Those difficulties can weigh heavily on depository institutions, particularly mid-size and community banks that hold a greater amount of commercial real estate mortgages relative to total size than larger institutions, and have – especially in the case of community banks – far less margin for error. But some aspects of the structure of the commercial real estate markets, including the heavy reliance on CMBS (themselves backed in some cases by CDS) and the fact that at least one of the nation’s largest financial institutions holds a substantial portfolio of problem loans, mean that the potential for a larger impact is also present.

There is no way to predict with assurance whether an economic recovery of sufficient strength will occur to reduce these risks before the large-scale need for commercial mortgage refinancing that is expected to begin in 2011-2013.

The Panel is concerned that until Treasury and bank supervisors take coordinated action to address forthrightly and transparently the state of the commercial real estate markets – and the potential impact that a breakdown in those markets could have on local communities, small businesses, and individuals – the financial crisis will not end.

CMBS Trusts Take Beating As Loans Are Liquidated

2010-02-04T11:47:00.000-08:00

December 2009 saw the largest ever liquidation of commercial mortgage backed securities. Over half a billion dollars in loans were removed from REMICs (real estate mortgage investment conduits) books. This represents a five fold increase over the same period last year.

Investors in these CMBS bonds lost hundreds of millions. Most of the loans were sold for less than 50% of their face value and some even sold for less then 10 cents on the dollar.

2009 ended with loans over $60 billion in special servicing, up from only $12.8 billion 12 months earlier. A loan that is in special servicing is a loan that is either in default or likely to default soon.

Over $40 billion of CMBS loans were behind in payments as of the end of December, according to Realpoint, a nationally recognized credit-rating agency.

Lawmakers Urge Treasury to Support The CRE Market

2010-02-03T20:45:00.000-08:00

WASHINGTON - This week, Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, and Congressman Ken Calvert (R-CA), sent a bipartisan letter to Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke about the growing concerns that deteriorating conditions in the commercial real estate (CRE) market may threaten an economic recovery.

"The growing bubble in the commercial real estate industry has the potential to infect our economy and slow a recovery," said Chairman Kanjorski. "In order to safeguard the businesses operating on Main Street and protect the millions of jobs depending on commercial real estate, the Treasury and the Federal Reserve now must take needed and urgent action to stave off a potentially devastating wave of commercial real estate foreclosures and bank losses."

"I am deeply concerned about the health of our commercial real estate market and the stability of thousands of small businesses across the country," said Congressman Calvert. "We must take the appropriate steps to ensure that our commercial real estate market does not experience a liquidity crisis that would further exacerbate our struggling economic situation."

"A liquidity crisis in the commercial real estate market is hurting small business owners across the entire nation," said National Association of REALTORS President Vicki Cox Golder, owner of the commercial real estate company Cox & Associates in Tucson, Arizona. "I join with all commercial property owners who applaud the efforts of Reps. Calvert and Kanjorski to resolve this problem and put small business owners back in business."

Specifically, the letter asks regulators to take the following steps:

Establish a clear method for measuring and evaluating the effectiveness of recent CRE loan modification guidance issued by the regulators.

Institute metrics to more clearly differentiate performing versus non-performing loans as well as any other steps that provide lending institutions with more confidence in assessing CRE loans.

Make clear public statements encouraging lenders to continue to make credit available for performing assets as a means of restoring confidence and long-term value in the CRE market.

The $6.7 trillion CRE sector supports 9 million American jobs. If the conditions in the CRE market deteriorate further the negative effects will be significant and widespread, rippling not only through the CRE sector but also the broader economy. More than $1.4 trillion in commercial mortgages will come due by 2013, and as much as 65% of those deals will have trouble getting refinanced according to recent analysis conducted by Deutsche Bank. While the Federal Reserve and Treasury Department have acknowledged the ongoing CRE challenges, their actions have so far failed to ease growing concerns among economists and market participants.

The text of Congressmen Kanjorski and Calvert's letter which is signed by an additional 77 Members of Congress to Secretary Geithner and Chairman Bernanke from February 1 follows:

Dear Secretary Geithner and Chairman Bernanke:
As you know, the financial crisis continues to have a dampening effect throughout the credit markets. The commercial real estate (CRE) market, in particular, continues to experience difficult credit accessibility conditions. Moreover, the scarcity of credit in the $6.7 trillion CRE sector poses a dangerous threat to our financial system just as our economy has begun to show signs of recovery.

Earlier this month real estate data provider Trepp announced that the delinquency rate for loans underlying commercial mortgage-backed securities (CMBS) ballooned 500 percent in 2009, surpassing 6 percent in December for the first time. Additionally, the CMBS market has all but shut down over the past year making it more difficult for CRE owners to sell or refinance.

We appreciate the acknowledgement by federal regulators of this situation in October, when the Board of Governors of the Federal Reserve System, along with the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, and the Office of Thrift Supervision, issued a policy statement advising financial institutions to extend and/or restructure loans backed by income-producing and/or development properties whenever possible in order to minimize losses as well as to stabilize overall asset values in the communities they serve.

While the regulatory guidance is a relatively recent occurrence, we remain concerned by early indications that it may not yet be having the desired impact in stabilizing the CRE market. While some properties are in desperate need of modification due to the economic downturn, we are not convinced these loans are being serviced properly or in an efficient manner. Of even more concern, anecdotal evidence suggests that regulators continue to encourage lenders to write down the value of performing loans, whose payments may well be current and, in some instance, even call the loan. This further exacerbates the crisis by creating defaults in properties that were able to meet their debt servicing.

To ensure the recent CRE loan modification guidance will have a positive and stabilizing effect, and to protect the broader economy from further disruptions, we urge you to establish a clear method for measuring and evaluating its effectiveness. Furthermore, we encourage you to institute metrics to more clearly differentiate performing versus non-performing loans as well as any other steps that provide lending institutions with more confidence in assessing CRE loans. We also call upon you to make clear public statements encouraging lenders to continue to make credit available for performing assets as a means of restoring confidence and long-term value in the CRE market.

In sum, we strongly believe that regulators must take continued steps to mitigate ongoing turmoil in the CRE sector before it becomes a full-fledged crisis, forestalls our economic recovery, and possibly requires additional taxpayer-funded capital injections. Consistent with all applicable law and regulation, thank you for the consideration of our views and your attention to these matters.

###

source http://kanjorski.house.gov/

Commercial Loan Modifications and Other Favorable Outcomes

2010-02-03T20:21:00.000-08:00

When a commercial property owner hires a commercial modification consultant, a permanant modification is only one of many possible outcomes. Often the property owner is focused on one particular outcome without regard to other possibilities that are often more realistic.

Take a recent example of an owner of an apartment complex that was hell-bent on getting the mortgage holder to grant a principle reduction so that he could sell the property for a profit. He said he could get nowhere with the bank (no surprise there) and wanted to hire a consultant to negotiate a short payoff.

The reality is that the bank won't go for that kind of deal, it just stinks for them. The only way to get the note holder to reduce the principal is to pay him off prior to the sale of the property. One way this could be accomplished is to make a bonafide offer on the note.

A friendly note buyer would then allow the owner of the complex to sell it to a third party and share the profit. Another option would be a short refinance in which a friendly note buyer would buy the mortgage and restructure the terms with the current owner.

Every situation is different. In order to make a recommendation of the best course to take as an owner, an in-depth study must be preformed in order to uncover all of the facts that are relevant.

CommercialModificaiton.com offers consulting services to business owners. Click or call for a thourough evaluation of your situation.

Tishman Walks Away From $5.4 Billion Mortgage

2010-01-28T17:27:00.000-08:00

Watch this video discussing the largest CMBS mortgage deal to ever go bust, this month when investors walk away from from an underwater mortgage.

Commercial Real Estate & Loan Modification News

2010-01-16T09:10:00.000-08:00

Stuyvesant Town/Peter Cooper Village apartment complex misses loan payment - Reuters

Commercial Mortgage Delinquencies Spike, But There Is Hope - Wall Street Journal

A bottom in CRE?

2010-01-15T09:55:00.000-08:00

Recently, talking heads on CNBC and elsewhere have been calling a bottom in CRE. I am not so sure. See this article by CNBC's Diana Olick.

Here are some numbers we reported yesterday from Trepp, a leading provider of CMBS and commercial mortgage information and analytics:
Commercial MBS delinquencies rise 502 percent from a year ago to 6.07 percent.
Hotel CMBS delinquencies jump 900 percent to nearly 14% of all loans in default.
Those are just a few ridiculous stats that I need to throw out to preface today's premise that commercial real estate is a buy.

Am I nuts?
No. Look, there is definitely going to be more pain before we see any gain, but after two interviews today, I started to think that maybe it's not all blood and guts in the market.

"We have seen a trend that keeps ticking upward, and we currently do not see a reason to say that that has plateaued, so we don't think the other shoe has ropped yet," says Trepp CEO Annemarie Dicola. But on the flip side, she adds, the investors are circling. "We find that a lot of our users are combing through the data looking for some interesting distressed opportunities, to try to find the overvalued properties that maybe now should be revalued and invested in."

We already know that Harry Macklowe is jumping back in to the lot vacated by the old Drake Hotel in Manhattan. Also, Blackstone Group is going after Highland Hospitality, a lodging REIT, despite the nasty numbers I wrote above. Why? There is activity, especially in the office sector.

"There's a significant increase in the velocity of leasing, and by velocity I mean the number of square feet leased on a monthly basis," says Steve Siegel, Global Brokerage Chairman at CB Richard Ellis. "New York, for example, the first five months January through May we had an average of 900,000 square feet leased and from June until the end of December we had 1.8 million, so roughly a 100 percent increase per month."

There is also more activity in retail, of course depending on where you are. If you add the fact that commercial real estate construction has ground to a halt, and there is not the oversupply in commercial that there is in residential, you also see the positives. I'm also told lenders are working harder to save some of the delinquent loans, which Dicola calls a "green shoot." And that's making investors' ears perk up.

"What we have seen at trepp absolutely is a lot of new entrance to the CMBS market, a lot of investor groups that have been forming, circling and studying a lot of the data, and we see a lot of preparation for investor activity in this market," says Dicola. She cites three successful CMBS offerings at the end of 2009 after an 18 month drought. Investors have built up cash, and "volatility has now created a market for them.

Commercial Modification Consulting Business Opportunity

2010-01-06T17:03:00.000-08:00

As the commercial real estate market looks for footing, the volume of defaulting commercial loans is rising at the fastest pace ever. Property owners and banks alike are scrambling to come up with solutions in an environment of shrinking rents rising vacancies and the absences of a commercial mortgage market. All of these factors together create an opportunity for consultants to help property owners resolve their mortgage problems.

CommercialModification.com, has assembled a group of highly experienced negotiators and processors to facilitate commercial loan modifications and other optimal resolutions for commercial property owners.

CommercialModification.com is offering a branch affiliate business opportunity to real estate agents, mortgage brokers, consultants and attorneys. Becoming a CommercialModification.com branch affiliate, instantly brings credibility and substance to the services that you currently offer your clientele.
Sales Support

CommercialModification.com branch affiliates get 100%, 360 degree support in everything from marketing and initial sales calls to customer acquisition and follow through. The company offers advanced web based lead followup and sales cycle completion reporting.

Back Office Support
The commercial modification process involves extensive negotiations, in-depth market research, financial analysis and hours of tedious data collection, discovery, verification and reporting. After we make the sale of the consulting services, the professional team follows up and executes the plan that is proposed.

Internet Marketing
CommercialModification.com provides a regional sub-domain website for each branch affiliate. As the number one ranked website for commercial mortgage modification, www.commercialmodification.com gets the lions share of web traffic in this vertical market. In order to attract local search engine traffic, each branch affiliate will have a unique website that will be targeted to generate local commercial modification leads. An example of a regionally targeted sub domain is http://newyork.commercialmodification.com. This website has already achieved a high rank on Google searches for "new york commercial loan modification".

Training
Initial training is conducted by weekly webinars. These are 1 hour meetings with 30 minutes of prepared material and 30 minutes of Q and A. The topics will include marketing, prospecting and client intake. Branch affiliates will participate in the sales process and customer webinars. You must attend at least 10 client webinars and complete a written exam to be qualified to conduct client webinars. Each quarter there is a 3 day training seminar at the processing center in Arizona.

How to get started.

The first step is to register for a webinar. Go here to sign up. We will send you an invitation for the next scheduled webinar.

Commercial Modification Consulting Opportunity Webinar Schedule

2010-01-05T17:06:00.000-08:00

CommercialModification.com is offering a branch affiliate business opportunity. Interested parties can attend a 30 minute webinar that outlines the background of the key players and the depth and scope of services offered to commercial property owners.

Prospective affiliates will get an overview of the branch enrollment process and commercial modification consulting business opportunity.

Tuesdays 900 am Pacific Time

Thursday 300 PM Pacific Time

To register http://www.commercialmodificationleads.com/Webinar_Registration.html

Commercial Modification News

2010-01-05T16:08:00.001-08:00

(FED) The Economic Outlook - Forex Hound

Balance is key, new boss believes - Boston Globe

The Biggest Losers - Wall Street Journal

Real estate faces a tough slog to recovery - Wall Street Journal

Commercial Loan Mod Consulting Opportunity Webinar

2009-12-21T17:56:00.000-08:00

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

2009-12-21T14:54:00.000-08:00

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

2009-12-11T15:27:00.000-08:00

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

2009-12-09T17:37:00.001-08:00

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

2009-12-07T14:29:00.000-08:00

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

2009-12-01T18:27:00.001-08:00

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

2009-11-30T11:53:00.000-08:00

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

2009-11-17T09:31:00.000-08:00

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

2009-11-12T17:02:00.000-08:00

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

2009-11-11T09:14:00.000-08:00

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

2009-11-09T13:42:00.000-08:00

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

2009-11-06T14:36:00.000-08:00

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

2009-11-02T08:20:00.000-08:00

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

2009-10-30T13:45:00.000-07:00

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

2009-10-28T10:46:00.000-07:00

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

2009-10-27T20:39:00.000-07:00

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

2009-10-23T12:32:00.000-07:00

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

2009-10-19T10:27:00.000-07:00

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

2009-10-19T06:54:00.000-07:00

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.

2009-10-16T00:31:00.000-07:00

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

2009-10-14T16:26:00.000-07:00

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

2009-10-12T09:38:00.000-07:00

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

2009-10-10T11:02:00.000-07:00

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

2009-10-08T15:26:00.000-07:00

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.

2009-10-03T15:42:00.000-07:00

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

2009-10-02T10:00:00.000-07:00

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

2009-09-27T14:05:00.000-07:00

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

2009-09-23T12:30:00.000-07:00

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

2009-09-16T06:01:00.000-07:00

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

2009-09-14T10:22:00.000-07:00

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

2009-09-02T08:15:00.000-07:00

How to pay the national debt.

2009-09-02T06:56:00.000-07:00

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...

Questions for Geithner regarding commercial mortgage modification

2009-08-31T10:20:00.000-07:00

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?

2009-08-15T13:07:00.000-07:00

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.

2009-08-09T12:52:00.000-07:00

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

2009-07-25T10:08:00.000-07:00

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

2009-07-18T09:02:00.000-07:00

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

2009-05-23T20:22:00.000-07:00

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

2009-05-23T18:27:00.000-07:00

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

Commercial Loan Modification Blog

Transparency Coming to 'Extend & Pretend'

More Transparency Coming to Hidden Costs of 'Extend & Pretend' Strategies

Federal Reserve Weighs In on CRE

Testimony of Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation

Before the Congressional Oversight Panel, Washington, D.C.

February 4, 2011

Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation

SBA Mortgage Relief Program to Small Businesses

Release: Congresswoman Jackie Speier Announces SBA Mortgage Relief Program to Small Businesses

Commercial Real Estate News

Commercial Modification News

Maximizing Profits In Distressed Commercial Real Estate

The Proper Care and Feeding of Bankers

Recent Successes Negotiating with Lenders

Strategic Defaults in Commercial Real Estate

By, Dr. Ted C. Jones, Economist Stewart Title

Recent Commercial Modification Success Stories

Recent Commercial Modification News

To Fix Sour Property Deals, Lenders 'Extend and Pretend'

Fitch Takes Various Actions on Bear Stearns Commercial Mortgage

BERNANKE ON COMMERCIAL REAL ESTATE

Commercial Loan Workouts and Modifications

Commercial Loan Modification Article in National Mortgage Professional Magazine

Record CMBS Delinquencies Reported by Realpoint

Video: How Will The CRE Bubble Be Resolved?

Congressional Oversite Panel Issues Gloomy CRE Report

CMBS Trusts Take Beating As Loans Are Liquidated

Lawmakers Urge Treasury to Support The CRE Market

Commercial Loan Modifications and Other Favorable Outcomes

Tishman Walks Away From $5.4 Billion Mortgage

Commercial Real Estate & Loan Modification News

A bottom in CRE?

Commercial Modification Consulting Business Opportunity

Commercial Modification Consulting Opportunity Webinar Schedule

Commercial Modification News

Commercial Loan Mod Consulting Opportunity Webinar

CMBS Market Thaws As Defaults Increase

Peter Schiff on Housing Video Blog

House Flipping Makes A Comeback

Mortgage Trade Group Reports Increased Commercial Delinquencies

Treasury Issues Guidance On Short Sales

Further declines in commercial real estate forcast by Moody's

Recent Commercial Mortgage Modification Consulting Requests

Real Estate Attorney Stephen Meister Video On Fox Business

Fed Survey Shows Banks In Line With Pretend & Extend

Commercial Real Estate Bottom Expected in 2011

Senate Votes To Extends First Time Home Buyers Tax Credit

Government Gives The Green Light To Pretend and Extend

FDIC Adopts Guidance on Prudent Commercial Real Estate Loan Workouts

CLARIFICATIONS AND CHANGES TO THE REMIC RULES

Peter Schiff on Real Estate Investing

Interagency Bank Regulators Prepare Commercial Modification Guidance

Regulators Discuss Commercial Loan Modification

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

Interest in commercial loan modification business intensifies.

The nitty gritty on SB 94

SB 94 Signed into Law

CA SB 94 Leaves Homeowners in Unfair Fight

Commercial Real Estate Decline

Spike in Commercial Modification Requests

Recent Commercial Mortgage Modification Consulting Requests

Leadsnet Inc Press Release

IRS Relaxes Rules for Modification of Commercial Mortgages

Banking on Geithner

FHA - The new subprime hazard

How to pay the national debt.

More Questions For Geithner

Questions for Geithner regarding commercial mortgage modification

A New Paradigm For Commercial Real Estate Financing?

No End In Sight To Commercial Real Estate Financing Crisis.

Gov Has No Plan for Coming $1 Trillion CMBS defaults

Commercial Mortgage Modification Consulting

Difficulty in Restructuring Commercial Loans

Commercial mortgage modifications a challenge

Fitch
Takes Various Actions on Bear Stearns Commercial Mortgage