Questions for Geithner regarding commercial mortgage modification

By Ted Schmidt

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

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

What would you ask him?

A New Paradigm For Commercial Real Estate Financing?

By Ted Schmidt

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

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

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

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

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

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

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

No End In Sight To Commercial Real Estate Financing Crisis.

By Ted Schmidt

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

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

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

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