Commercial Loan Modification USA » commercial loan workouts

Chris Dodd Urges Commercial Loan Modifications. Will Bernanke and Banks Listen?

admin — Wed, 24 Feb 2010 23:34:22 +0000

Chris Dodd Demands Commercial Loan Modifications

Below is a letter written by Chris Dodd the top Democrat on the Senate Banking Committee to Ben Bernanke asking him to recommend that banks begin to modify more commercial loans. Will they listen?

February 22, 2010
Ben S. Bernanke
Chairman
Board of the Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Dear Chairman Bernanke:

I write to express my concern about the state of the commercial real estate (CRE) market and the potential impact on the financial system and the greater economy.

Recent reports and testimony indicate that while the economy is showing signs of stabilizing, the CRE market continues to face significant challenges. The Congressional Research Service, for example, reported last month that commercial mortgage defaults and losses are at unusually high and increasing levels. According to the report, delinquency rates for commercial mortgages climbed from 4% at the end of the third quarter of 2009 to more than 6% in January 2010.

I understand that you have been raising concerns about the CRE market as well. Indeed, in a speech before the Economic Club of New York in November 2009, you stated that “poor fundamentals have caused a sharp deterioration in the credit quality of CRE loans” and that these “pressures may be particularly acute at smaller regional and community banks.”

Others also have expressed concerns. At a hearing last month before the Congressional Oversight Panel (COP), a Federal Reserve official testified that “Federal Reserve examiners are reporting a sharp deterioration in the credit performance of [CRE] loans in banks’ portfolios and loans in commercial mortgage-backed securities,” and warned that more than $500 billion of CRE loans will mature each year over the next few years. This point was reinforced in an oversight report published by the COP this month, which stated that nearly half of CRE loans at present are “underwater” and that the largest “loan losses are projected for 2011 and beyond.”

In response to the growing concerns, I understand that last October the Federal Reserve and other agencies on the Federal Financial Institutions Examination Council released a policy statement on prudent commercial real estate loan workouts to “assist examiners in evaluating institutions’ efforts to renew or restructure loans to creditworthy CRE borrowers.” I appreciate your efforts to coordinate action in addressing this critical issue and ask that you keep me informed as to your progress. While it may still be relatively early in the process, I would like you to provide an update on how this guidance is helping to stabilize the CRE market. In addition, I would like an explanation of how the Federal Reserve has addressed the CRE issue so far, and what additional steps you plan to take.

I believe that the weakness in the CRE market requires prompt and robust responses from the regulators to guard against harmful effects on financial institutions and the economy. I urge you to redouble your efforts to provide appropriate oversight of this vital component of our economy, and look forward to working with you to bring much needed stability to the CRE market.

Sincerely,

CHRIS DODD
Chairman

Commercial Loan Modification for CMBS — What You Need to Know

admin — Mon, 28 Dec 2009 15:58:05 +0000

Commercial loan modification can provide a welcome relief to commercial property owners who are behind on their commercial mortgage payments or have seen a drastic decrease in their property values because of a hardship such as increased vacancies. Commercial loan modifications offer the commercial property owner the ability to keep their property, increase their cash flow and avoid foreclosure. The first point to consider when examining commercial loan modification options is to determine what entity has underwritten your commercial loan. The vast majority of commercial loans fall into one of four categories: commercial mortgage backed securities, life companies, Fannie Mae and FDIC insured banks. The focus of this article is the current situation for the commercial loan modification of commercial mortgage securities.

According the Mortgage Bankers Association’s 3^rd quarter report, the “Commercial/Multi-family Delinquency Rates for Major Investor Groups”, commercial loans underwritten by commercial mortgage backed securities (CMBS) have seen an increase in delinquency rates to a new high of 4.06 percent. The delinquency rate for CMBS is now the now at the highest level ever recorded. This presents a serious problem for many commercial property owners who have loans that were packaged as CMBS because the commercial loan modification process for these loans can be a cumbersome and difficult process that is further complicated by the fact that there are many levels of ownership that must be considered during the commercial loan modification process.

CMBS are designed to build in a certain level of defaults. The problem the industry is facing now is that defaults have increased well beyond what had originally been projected. Now the bond holders of the securities are facing the prospect of losing their investment capital. CMBS loans are structured with different levels of bond holders. Those at the top of the ownership chain, generally banks, will recover the most money in the case of a foreclosure. Those at the top are referred to as senior bond holders. The bondholders who took on more risk, expecting a greater return, are known as the junior bondholders. The rights of bondholders are protected by agreements such as the Pooling and Service Agreement (PSA) which provides voting rights to junior bondholders. The differing interests between senior and junior bondholders can make a commercial loan modification a difficult and lengthy process.

For example, an apartment building might have an outstanding loan balance of $20 million, but the actual value has dropped to $15 million. The borrower might agree to support the debt at the current value of $15 million if the $5 million is written off. If you make this proposal to the senior bond holders they will probably agree but the junior bondholders, at the bottom, will probably end up eating most of that write off and will not be willing to take the loss. In fact, if the junior bondholders are dealing with three or four of these discounts at the same time, they could get totally wiped out and realize a 100% loss on their investment capital.

For this reason, those investors who stand in the first loss position are very adverse to approving a write-off. Different lenders and bondholders on different rungs of the ladder have different interests. It can be difficult to work out a successful commercial loan modification.

There is a potential tidal wave building right now in the commercial real estate market with $1.7 trillion of outstanding CRE debt on bank books. Currently, most commercial loan defaults are occurring as the note balloons. Commercial property values have dropped by 40% in most areas of the country and with stricter underwriting guidelines most commercial real estate owners are finding it impossible to refinance their loans.

The Outlook for Commercial Loan Modifications in 2009

admin — Mon, 10 Aug 2009 20:53:10 +0000

.	Nearly $73 billion worth of commercial real estate loans are in some level of financial distress
.	Credit Markets Remain Frozen
.	Slashing Rents, Incentive offerings, Demanding Concessions
.	Empty storefronts, Office buildings and Warehouse Space.
.	The losses from commercial real estate loans could hit $53 billion, or 8.5 percent of their overall loan losses over the next two years.
.	Apartment loans are expected to rise further as unemployment climbs, leaving landlords struggling to fill vacancies and make their mortgage payments.
.	Delinquency rates and defaults on office and retail buildings and hotels have more than doubled in just six months.
.	For apartments and industrial buildings, the rates have increased more than 80 percent
.	Overall, some $270.5 billion commercial property loans are expected to come due this year alone
.	And it’s likely many borrowers won’t be able to refinance¡