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
Showing posts with label CMBS. Show all posts
Showing posts with label CMBS. Show all posts
Wednesday, October 13, 2010
Wednesday, March 3, 2010
Record CMBS Delinquencies Reported by Realpoint
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
Geography
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
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.
Thursday, February 4, 2010
CMBS Trusts Take Beating As Loans Are Liquidated
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.
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.
Thursday, January 28, 2010
Tishman Walks Away From $5.4 Billion Mortgage
Watch this video discussing the largest CMBS mortgage deal to ever go bust, this month when investors walk away from from an underwater mortgage.
Saturday, January 16, 2010
Friday, January 15, 2010
A bottom in CRE?
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.
Monday, December 21, 2009
CMBS Market Thaws As Defaults Increase
Government intervention appears to have a positive affect in reviving the moribund CMBS market which died following the sub-prime crisis in 2007. The federal reserve has been buying CMBS's as well as providing fresh capital to banks through the TALF program which allows banks to put up qualified CMBS and CDO's as security for new loans at very loan rates. The banks can then use these funds to issue new securitized loans to fund purchase and refinance of commercial loans.
Recent private CMBS offerings have had positive receptions in the market including a recent offering by JPMorgan in which Inland Western Retail Real Estate Trust Inc., an Oak Brook, Ill.-based non-listed REIT, closed a $625 million loan.
Wells Fargo, Goldman Sachs, Bank of America and JP Morgan, all have already announced their involvement in new CMBS deals.
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.
Monday, December 7, 2009
Mortgage Trade Group Reports Increased Commercial Delinquencies
Commercial real estate loans showed continued increases in the rates of delinquencies, the Mortgage Bankers Association (MBA) reported in a recent survey.
MBA's Commercial/Multifamily Delinquency Report keeps records on delinquencies of commercial real estate loans.
Last quarter borrowers of commercial mortgage backed securities (CMBS) loans topped 4 percent during the quarter. They also reported that life insurance companies who own commercial loans had loans that fell behind at an increase by a 1/4 of a percent and the 60+ day rate on multifamily loans in Fannie Mae's portfolio increased by 0.11 percentage points to 0.62 percent.
The increase in delinquency rates is expected to continue throughout 2010 and peaking in 2011. There is about $300 billion in negative equity overhang that needs be refinanced in 2010 and 2011. Much of these loans will end up in foreclosure or sold as short sales or modified to either extend the loan maturity or reduce the principal balance.
The government recently announced guidance for prudent commercial loan work outs. This policy change, while beneficial for some borrowers only serves to extend the problem as banks are unwilling to write down loan balances when their government handlers and owners let them keep the loans on the books at full value in the absence of mark-to-market accounting.
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.
Monday, November 30, 2009
Further declines in commercial real estate forcast by Moody's
Moody's said in a press release last week that commercial real estate will continue to decline in value before a long term stabilization occurs and the market begins to recover. The income stream produced by commercial real estate which has been sold to investors as CMBS will not recover soon causing further declines in CMBS values. Maturing CRE loans in these pools will not be able to be refinanced as maturities of bubble value loans approach.
The rating agency says that they will be downgrading CMBS tranches that were issued as late as 2008 - well into the bubble deflation. They went on to say that the cash flows for properties with short-term lease structures, such as hotels and multifamily, will likely hit bottom in 2010 or early 2011. The bottom for office, retail and industrial properties will take longer to form.
Moody's says that property values have deflated 42.9% from their peak and thinks that the bottom will hit in up to two years from now at a 45-55% decline from the peak.
Source: http://v3.moodys.com/viewresearchdoc.aspx?docid=PR_190851
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
Tuesday, November 17, 2009
Recent Commercial Mortgage Modification Consulting Requests
A strip mall owner in Las Vegas paid $7 million with $2.5 down payment in 2005. Today the property is only worth $3 million and the loan amount is still over $4 million. The property is not producing enough cash flow to cover the debt service and the loan, which is in a CMBS pool has been assigned to a special servicer.
The property has a 45% occupancy and the existing tenants are clamoring for lease modifications. Cash flow is declining as the vacancy rate is expected to increase over the next 12 months as businesses in the area are closing and unemployment remains over 13%.
Considering the fact that the property can not sustain the debt service for this loan amount, the note holder, or in this case the bond holders are going to take a hit. How much of a hit is what is up for negotiation.
The loan may have already been removed from the CMBS pool because of its non performing status and sold to an investor for as little as 20 cents on the dollar or even less. In that case the owner of the note, who may have paid only $1 million would be willing to accept an offer that provided a handsome return on investment.
If the property owner could arrange for a new investor to come in and buy out the note, then refinance based on the current value the new loan amount would be $1.8 million and even with 50% occupancy the property would cash flow.
While this example makes some big assumptions, the principles are sound. The people taking the biggest hit are the CMBS bond holders. The fact is they took the hit already in 2008 when the CMBS bond market seized up.
If the loan is still part of the CMBS pool, it can be removed from the pool and sold or the servicer can agree to a modification that would reduce the principal balance, extend the term or lower the interest rate.
In October the Treasury Department changed the IRS rules to allow CMBS servicers to change the terms of the loans without the IRS calling into question the tax exempt status of the REMIC. Prior to this rule change servicers could only foreclose or offer short term changes to CMBS loans.
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.
Sunday, September 27, 2009
Recent Commercial Mortgage Modification Consulting Requests
Commercial property owners are requesting help from consultants for the purpose of modifying their commercial loans at CommercialModification.com. Building owners are looking to preempt defaults as they can see that their notes are coming due or resetting and there is not enough equity to refinance.
The recent projects we have seen come through the site include two 42 unit buildings valued at over $6 mil., that have been put into default by the servicer because of missed property tax payments. Current occupancy is 95% and rent roll $62K. The owners is trying to reinstate with better terms or refinance.
An owner of a retail showroom and warehouse in northern California who put $1 million down payment a few years ago has lost nearly all his equity. He is now two months behind and making weekly payments on a loan that is close to the value of the property.
The owner of a 16 unit apartment complex in Mesa, AZ., who put $300K down 3 years ago has a loan reset in Jan 2010 when it adjusts upward. It is now only worth $400K and the loan amount is $688K. The owner of this loan faces a substantial loss if a modification is not completed before the reset date as financing is unavailable to pay off the resetting loan and the property would sell for substantially less if there were a forced liquidation. The cash flow on the property is insufficient to cover the debt load so modification is a best case scenario.
This property owner wanted to consult with firms who have a good track recorded in designing modification programs that are acceptable to the bank and servicing companies. A third party negotiator always puts you in a superior bargaining position in any type of negotiation.
The owner of 37 units in Darby PA purchased for $1,400,000 and now only worth $450,000 has a loan of $825,000 @ 13% fixed. This is another case where the debt service is a hardship because of declining rents and increasing vacancies.
Each of these unique situations present challenges for both the lender and borrower. Special Servicers, who are hired by mortgagors to deal with large commercial loans that are in default or likely to default, now have more leeway in negotiating workouts with property owners whose mortgages have been financed by selling shares to investors in the form of commercial mortgage backed securities.
Prior to a recent IRS rule change (IRS 09-45), special servicers had been opposed to any change in the status quo. The barrier removed by the Treasury department, which I applaud, allows the REMICS's to change the terms of these loans without jeopardizing their tax exempt status.
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.
Wednesday, September 16, 2009
IRS Relaxes Rules for Modification of Commercial Mortgages
Effective today, the IRS has issued a new rule (IRS Revenue Procedure 2009-45 http://www.irs.gov/pub/irs-drop/rp-09-45.pdf) that eases the restrictions on modifications of commercial mortgages that have been packaged into commercial mortgage backed securities.
This action allows borrowers to open discussions with the loan servicer prior to any default in an attempt to work out the loan. Prior to this new rule only a very small number or loans in a servicing pool could be modified and they must already have been in arrears.
Commercial property owners can get a free consultation at http://www.commercialmodification.com
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
Monday, September 14, 2009
Banking on Geithner
Last week I went to went to Washington DC to participate in the CNBC Town-hall meeting with Treasury Secretary Tim Geithner. I had some tough questions for him regarding the treasury departments stance on modification of mortgages that have been packaged into commercial mortgage backed securities (CMBS). At issue are the IRS rules that prohibit modification of these commercial loans. The problem is that real estate mortgage investment conduits (REMIC) are not allowed to acquire new loans after the formation of the REMIC. A loan modification is considered a new loan if if it is adjusted beyond 1/4 of a point or more than 3 years.
The Treasury did ask the public for help in formulating guidance on the issue back in 2007 (http://www.irs.gov/pub/irs-drop/n-07-17.pdf) and Geithner was questioned by congress but the Treasury has yet to issue any guidance on the subject.
Unfortunately, the CNBC Town-hall meeting was too short for me to get to ask the Secretary the questions I had prepared and instead the meeting dealt with broader issues. The meeting can be seen below.
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.
Saturday, August 15, 2009
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.
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.
Saturday, July 25, 2009
Gov Has No Plan for Coming $1 Trillion CMBS defaults
Earlier this week, Fed Chairman Ben Bernake appearing on Capitol Hill said that commercial mortgages packaged into CMBS "ought to" be modified the same way residential mortgage backed securities are now.
The total arrears on all CMBS reached $817 billion in June. This represents a 4.5% delinquency rate. This has increased from a 2% rate last year and is expected to reach $1 Trillion by the end of the year.
On Friday, Treasury Secretary Timothy Geithner, appeared before the House Financial Services Committee.
Rep. Carolyn Maloney, who described the commercial mortgage situation as a "ticking time-bomb" questioned Geithner about commercial loan modifications. She asked what administrative guidance the Treasury will issue as they did with residential modifications. He said "we have not made a judgment as to whether that is necessary, appropriate or possible and he would be willing to discuss it in more detail".
Rep. Maloney went on to ask what the problem is with giving modifications on CMBS the same as residential mortgage backed securities. He said "it is an enormously complicated set of issues and we will talk to you and your staff about it later".
We will have to wait and see what will happen in the coming months as the fuse burns down. It is obvious by Giethners testimony that our leadership in Washington has no plan to deal with this issue. Giethner does not even know if it is necessary?
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?
Saturday, July 18, 2009
Commercial Mortgage Modification Consulting
Commercial Mortgage Modification Consulting, by Ted Schmidt
Commercial property owners are increasingly under distress in today's economy. Over the next few years billions of dollars in commercial mortgages that were made in the bubble years of 2004-2007 will need to be rolled over with new financing. The problem is that many of these loans were made with loose underwriting standards to feed the demand for CMBS's. Now that values have declined 30-50% or more in some hard hit areas, refinancing is out of the question. Right now the water is receding and curious onlookers are rushing to the water's edge as the tsunami approaches.
Property owners are left with few choices and loan servicers are left with even fewer. Commercial securitization and servicing agreements prohibit loan modifications without unanimous consent of the actual securities owners. This is almost impossible since they are spread all over the world. Furthermore, senior tranche holders will never agree to modification since they stand to lose money to the benefit of the riskier junior tranches.
The only way to modify these loans is by judicial cramdown in bankruptcy or by other action of law. At some point the government will get involved to make provisions for commercial loans to be modified. The first few bailouts did not address the commercial real estate problem. There is likely to be a shift in political will towards forcing commercial modifications.
As for loans that are not securitized, there is an opportunity to negotiate and come to a resolution that works for all parties.
Consulting Opportunities
These business owners will want to prevent or delay a foreclosure to preserve the cash flow that they are receiving. In some cases these are high income individuals who have lost their primary source of income and are living off the cash flow from their building. Other cases are small businesses that have suffered a downturn in business and have fallen behind. The opportunity exists in helping these people save their property and preserve their income.
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.
Saturday, May 23, 2009
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. .....
I believe this policy accounts, in part, for the increase in Chapter 11's. As long a Freddie and Fannie continue with their "no modification" policy, I believe the use of Chapter 11's will become more common. As more borrowers learn that Chapter 11 can force a loan modification on an unwilling lender, the use of Chapter 11 will become more common. .....
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