Transparency Coming to 'Extend & Pretend'

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

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

By Mark Heschmeyer

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

SBA Mortgage Relief Program to Small Businesses

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 Loan Modification Article in National Mortgage Professional Magazine

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

Commercial Loan Modifications and Other Favorable Outcomes

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.

Commercial Real Estate & Loan Modification News

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

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

Commercial Loan Mod Consulting Opportunity Webinar

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.

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.

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.

Fed Survey Shows Banks In Line With Pretend & Extend

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.

Government Gives The Green Light To Pretend and Extend

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.

Interagency Bank Regulators Prepare Commercial Modification Guidance

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.