Difficulty in Restructuring Commercial Loans

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

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

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

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

Commercial mortgage modifications a challenge

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

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

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

Ted Schmidt
President
Leadsnet, Inc