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As Irvine commercial real estate loan modification attorneys, we were interested to see a recent article detailing a modification to a commercial loan for a major office building in Seattle. As the Seattle Times reported Sept. 15, Beacon Capital Partners, owner of the Columbia Center in downtown Seattle, has succeeded in winning an extension to its loan after six months of negotiations. The negotiations were complex in part because they were not with one lender, but with several representatives for bondholders with an interest in the property, which is part of a commercial mortgage-backed security. Before the loan modification, the 76-story property reportedly had the largest delinquent CMBS loan. Beacon is the largest investor in Seattle commercial buildings, and the article notes that it is in negotiations to modify other loans as well.

Beacon bought the Columbia Center in 2007, at the height of the CRE boom, and financed the purchase with a $480 million loan. The lender, Morgan Stanley, put $380 million of that loan into a mortgage-backed security; another $100 million was sold to private investors. Like many other owners of CRE, however, Beacon has found that it now cannot generate enough income from the property to make its payments. Almost 40 percent of the building is vacant, the article said, in part because Amazon recently moved employees out of the 177,000 square feet it had leased. Beacon stopped making loan payments in March. To avoid a foreclosure, the bondholders and Beacon agreed to extend the loan by three years, reducing its monthly payments by 38 percent. It also has two one-year extension options that, if exercised, would mean the loan would be due in 2017. A real estate analyst told the paper that neither Beacon nor its lenders really wanted a foreclosure.

Our San Diego commercial real estate loan modification lawyers do not doubt it. In fact, we are surprised not to see more articles about similar loan extensions. Foreclosure is never good for the lenders, but it's particularly bad right now because the properties are unlikely to fetch high prices in the current market. With many troubled loans coming out of the boom years of 2005-2008, this almost certainly means taking a loss. And of course, commercial borrowers prefer not to lose their own investments in their buildings. The practice of extending loans has been derisively called "extend and pretend," with the implication that lenders are pretending the borrower will be able to meet its obligations later. We do not believe this is such a far-fetched idea; after all, real estate is believed to be cyclical. In the short term, commercial real estate is suffering in proportion to the rest of the economy, but as the economy rebounds, a long-term or mid-term loan extension could allow lenders to keep collecting payments and make a profit on those loans.

Continue reading "Owner of Flagship Seattle Office Building Wins Loan Modification After Six Months" »

As San Bernardino commercial real estate loan modification lawyers, we were disappointed but not surprised to see that commercial real estate is driving increased losses at banks. That information comes from a report by Deutsche Bank AG in New York, Bloomberg News reported Sept. 10. In fact, the report said monthly losses on commercial loans more than doubled between April and August, to $501 million in the latter month. The article also reported on a separate Moody's report that also reported bad news in the CRE market -- the delinquency rate on commercial mortgages packaged into bonds has risen. A Deutsche Bank analyst said the jump in losses on CRE loans was the start of a trend caused by the rising number of loans that are in trouble and banks' increasing unwillingness to restructure smaller loans.

Fitch Ratings estimated that as of June 30, about $92 billion worth of loans are currently in "special servicing," meaning the borrowers are having trouble making payments and may be delinquent. That number is 25 percent higher than the value of loans in special servicing at the end of last year, and Fitch expects the number to hit $110 billion by the end of this year. The Deutsche Bank analyst said special servicers are giving up on trying to reach a loan workout on smaller loans, perhaps because they want to save their limited resources for reworking bigger and higher profile projects. As a result, the analyst said, lenders may start selling small loans in bulk portfolios more often. The article mentioned one financial company selling a portfolio of 20 non-performing loans with an average size of $5 million each. An observer told Bloomberg that more lenders are now willing to take a risk on such portfolios, driving up prices.

This information strikes our Los Angeles commercial real estate loan modification attorneys as odd. Lenders will not modify smaller CRE loans because they don't believe the return is worth the resources, but this means they are losing money. Wouldn't they lose less money if they put more effort into trying to save those nonperforming loans? There may be another factor that makes this a good business decision, but it was not reported. Meanwhile, the article says lenders will finance the purchase of portfolios full of small non-performing loans. These may be different lenders from the ones that won't finance attempts to change those loans so that they will perform. The financial industry is a complex system and it's doubtful that lenders are planning these strategies together. But it seems simpler for lenders to keep trying for workouts on loans that can reasonably be saved.

Continue reading "Deutsche Bank Data Shows Bank Losses Mounting as Lenders Stop Trying for Workouts" »

As Irvine commercial real estate loan modification lawyers, we have followed reports on the health of the commercial real estate marked for some time. So we were interested to see a recent report on delinquency among the loans backing different sectors of commercial real estate. The information comes from the Mortgage Bankers Association, which released second-quarter delinquency and 30-days-overdue numbers Sept. 2. That report, as HousingWire noted, said delinquencies among loans held in commercial mortgage-backed securities are at their highest since the association started tracking them in 1997. The same was not true for the other two categories of CRE tracked in the report, Fannie Mae multifamily loans and ordinary bank & thrift CRE loans. A MBA spokesperson suggested that those two categories have reached a plateau.

CMBS delinquencies rose from 6.83 percent in the first quarter to 8.22 percent in the second, both of which are massive increases over the 3.91 percent for 2009 and 0.53 percent for 2008. The Atlantic's Daniel Indiviglio made a chart of the data and offered some analysis. He pointed out that the loans chosen for CMBS are typically those considered more likely to default, suggesting that a higher delinquency rate was always likely. He also said the CMBS data included earlier-stage delinquencies than the other two, suggesting that earlier delinquencies could be driving the spike in all delinquencies. If this is the case, he said, those delinquencies could indicate that the commercial real estate market is still struggling for a recovery. However, he cautioned readers that the three datasets are not directly comparable, in part because the CMBS data includes REO properties while the others do not.

As San Diego County commercial real estate loan modification attorneys, we would like to see a recovery in the CRE market (as well as the residential market). Thus far, however, the data seem to suggest that this is not a strong possibility. In addition to the occasional news of a CRE foreclosures and walk-aways, the rest of the economy has simply not improved in a way that allows rents to increase and office and retail spaces to fill back up. In fact, if Indiviglio is right about the early-stage delinquencies, many more foreclosures could lurk in late 2010 and next year. This is bad news for the original borrowers whose loans have been securitized, because modifying CMBS is unlikely to be any easier than modifying securitized residential mortgages. In both cases, investors are legally entitled to hold up a loan workout or other action because they have a financial stake in the outcome.

Continue reading "Mortgage Bankers Association Study Finds Record High Delinquency Among CMBS" »

As Newport Beach commercial loan modification attorneys, we were interested to see a recent article suggesting that the trend of "walking away" from mortgages has now reached the commercial sector of real estate. The Wall Street Journal wrote Aug. 25 about at least three companies that have chosen to default on commercial loans because they believe it makes better business sense than continuing to pay the loans back. The article compares this trend to the debate among residential mortgage holders, where many people have accused walk-aways of failing to meet a moral obligation to repay their lenders, even if it makes good financial sense to abandon the loan. By contrast, the article said, there is less of a stigma for this in the financial world -- in fact, some companies that walked away have even been rewarded financially for what was seen by some as a smart business move.

The article cites at least four commercial property owners that have made strategic financial decisions to stop paying their mortgages and return the keys to the lender. They include Taubman Centers Inc., owner of the Beverly Center in Los Angeles, which walked away from a mortgage on a property in Atlantic City, N.J. Robert Taubman, the company's chief executive, told the Journal that the decision was not made lightly, but the gap between the $52 million value of the property and the $135 million paid was very large. At least one investor, Deutsche Bank's RREEF, reportedly favors companies that get rid of "money pit" properties, as long as their loans do not hold buyers personally responsible for a default. The article said whether a buyer walks away depends to some extent on the lender, noting that at least one borrower blamed its walk-away on its inability to make a deal with the lender. Nonetheless, it said lenders and investors take a financial hit when they are forced to re-sell properties at the bottom of the CRE market.

Our West Covina commercial real estate loan modification lawyers make this argument to lenders whenever we have a client seeking a loan workout in lieu of an outright foreclosure. Unfortunately, not all lenders are listening. As this article suggests, cold logic is likely to lead many CRE investors who bought at the height of the bubble to consider walking away. Those investors are also much less likely to be affected by the "moral obligation" argument being advanced in the residential mortgage debate, simply because commercial real estate is a business transaction for the buyer as well as the seller. Under those circumstances, lenders will probably need to take a hard look at the possible consequences before simply denying a loan workout or extension to commercial investors. Otherwise, they may be stuck with multimillion-dollar properties they cannot sell, or sell for their true value.

Continue reading "Commercial Property Owners Begin Exploring Walking Away to Deal With Debt" »

Commercial real estate prices saw their steepest drop in nearly a year this past June, a new report says. As Redlands commercial real estate loan modification attorneys, we were interested to see an Aug. 19 report from Bloomberg News, about the newest numbers from Moody's/REAL Commercial Property Price Index. That index dropped by four percent between May and June of 2010, the article said, the biggest drop since July of 2009. The Moody's index is calculated according to changes in commercial property sale values on a monthly basis, then combined and reported once per quarter. This report applies to the second quarter of 2010. In that quarter, it said, prices are down 0.9 percent from the beginning of the year.

Among types of commercial properties, the biggest drop came from retail spaces, such as malls and shopping centers. The index for those spaces dropped almost 11 percent in the second quarter. Industrial properties dropped by 2.9 percent. On the other hand, apartment buildings and office buildings saw a 4 percent gain. All of these properties are affected to some extent by the recession, the article suggested. Some observers had hoped that better results in the earlier part of 2010 were signs of an economic recovery, but the article said any recovery may now be faltering. Retail sales and consumer confidence were low this month, the article noted. One analyst quoted in the article said buyers may have been optimistic earlier this year because of better-than-expected retail sales, but this is now slowing down.

As Los Angeles County commercial real estate loan modification lawyers, we are disappointed to see that investors may have been overconfident. Because we work frequently with individuals and companies in financial distress, we are well aware that the economy has not rebounded as vigorously as anyone would like. A down economy is bad news for commercial real estate owners because without commercial activity, borrowers face a double-edged sword. On one side, depressed property values have put many loans underwater -- especially loans that were originated when property values were high, during what is now being called the commercial real estate bubble. Being underwater means the owner cannot refinance. On the other side, a bad economy also means fewer tenants, renters or guests filling those commercial spaces and pumping money into the business. As a result, some owners can't pay back loans or refinance, sticking them with immediate payment demands they simply cannot meet.

Continue reading "Report Says Prices for Commercial Real Estate Dropped Substantially in June" »

As San Bernardino commercial real estate loan modification attorneys, we were interested to see an article on a new wave of foreclosure that could come directly from the federal government. According to an August 3 article from the Wall Street Journal, The Federal Reserve Bank of New York is on the verge of deciding how to handle its "toxic" real estate portfolio, acquired when it took over assets from failed investment firm Bear Stearns in 2008. That $29 billion portfolio includes 50 commercial real estate loans and 9,000 residential loans, which are collectively worth about $5 billion, the article said. The Fed has already foreclosed on one commercial property, a mall in Oklahoma that is now up for sale, as well as homes in four states.

The New York Fed and its nationwide parent, the Federal Reserve Bank, don't generally make direct-to-consumer loans. According to the article, being thrust into that business by the Bear Stearns bailout puts the Fed in a tricky position, with conflicts between its role as a steward of the economy on the one hand and its need to dispose of the assets responsibly. Politics could also affect its work. The commercial loans lost 35% of their value in the two years before March of 2010, the article said -- but the Fed wants to avoid selling those assets at discount prices because it might hurt the economy. Buyers have been found for only $1 billion of the loans, and in a down market, the Fed could be stuck with properties it can't sell. It may also hesitate to modify commercial real estate loans that are joint ventures, because restructuring could take away its control.

In a way, our Irvine commercial real estate loan modification lawyers are gratified to see the Fed struggling with the same issues facing lenders and private investors in commercial real estate. Understanding those issues at one government agency could help guide better public policy from other agencies. But restrictions on modifying loans are bad news for everyone involved. If the Fed can't sell its properties, foreclosing doesn't make much sense. But if it also can't restructure some of those loans, it may have no other realistic choice but to foreclose. This is bad for the Fed and, by extension, taxpayers because it weighs us down with liabilities. Of course, it is also bad for the property owners who are foreclosed on, who lose their investments and their properties. And it's also likely to disrupt things at the businesses using those properties -- retailers, offices, hotels, multi-family housing and more.

Continue reading "Federal Bank Could Foreclose on Commercial Properties From Bailed-Out Bear Stearns" »

As Redlands commercial real estate loan modification lawyers, we were interested to read yet another take on the CRE market by a real estate company officer. Inland Real Estate Group Inc.'s Joe Cosenza, the company's vice chair, believes buying may fall off late in 2010 as prices of properties start rising, BusinessWeek reported July 29. The CRE market is showing some signs of improvement, the article noted. The Moody's Commercial Property Price Index rose by 3.6% in May, though it is still well below its peak in 2007, when the CRE business was booming. Cosenza believes this could actually hurt the market, as lenders react to higher real estate purchase prices and back off on their financial commitments to new buyers.

Cosenza's company and its affiliates have purchased about $3 billion worth of property since 2009, the article said, mostly shopping centers. He predicted that banks will be reluctant to throw a lot of money into commercial real estate lending when prices start to rise. This will cause the lenders to contribute less debt to purchases overall, he said, which could stymie a lot of deals. This backlash could push up capitalization rates, a measure of a property's net operating income divided by its purchase price. Those capitalization rates are at 7% to 7.5% at the moment, the article said, down from 9.5% at the beginning of this year. Cosenza said this was a record high and an opportunity for investors. Real Capital Analytics reported that commercial real estate sales fell by 67% from 2008 to 2009, the article noted, but bounced back by 58% in the first half of 2010 compared to the first half of 2009.

Our Long Beach commercial real estate loan modification attorneys would prefer a recovery in the commercial real estate market (as well as the residential market), but we wouldn't be surprised if he were right. Naturally, the recession has made lenders control their credit carefully, which is part of why commercial investors are having such trouble addressing problems with their existing loans right now. With many commercial properties underwater, CRE borrowers can't refinance loans to renew them, as is typical. And with the recession lowering rents and emptying office suites, retail spaces and hotel rooms, investors have no profits to buoy their properties. As a result, CRE borrowers are stuck with loans they can't pay off and can't refinance, leaving a loan modification as one of the best remaining options. Unfortunately, some lenders have proven reluctant to make meaningful changes to CRE loans, just as they were with residential loans.

Continue reading "Commercial Real Estate Official Predicts 'Double Dip' as Commercial Prices Rise" »

As Anaheim commercial real estate loan modification attorneys, we were interested to see a recent item in the Orange County Register's Lansner on Real Estate blog. The July 15 post reported on a study saying the number of California hotels whose mortgages are in "high financial distress" rose by 18% in the second quarter of 2010. High financial distress means the mortgage is in default or foreclosure. The information comes from Atlas Hospitality Group, a company that sells hotels in California. The blog noted that past reports have suggested firmer room rates and fewer vacancies at hotels, but that trend is not reflected in the report. This post comes on the heels of a similar July 14 post saying one in four Orange County office properties are still empty.

In all, the report said, the rate of distressed properties was 132% higher than it was in the second quarter of 2009. This large number is not a surprise to people who have followed the commercial real estate market crash. Atlas said that in Orange County, four hotels were owned by banks and 19 were in default. That's up from two foreclosed properties and 14 in default in the first quarter. Those numbers also represented a big jump from the second quarter of 2009, when one hotel was in foreclosure and nine were in default. Riverside County had the most foreclosed hotels in the state, at 11. The report suggested that the real number of distressed properties may be much higher, with more than 1,000 California hotels operating on "some kind of forbearance agreement." Interestingly, however, it noted that only 12 of the 100 foreclosed properties in the state had been resold by banks.

Our San Bernardino County commercial real estate loan modification lawyers suspect that banks would love to sell more properties -- if they could. Having followed the commercial real estate market throughout the year, we believe banks are having a hard time selling foreclosed properties for the same reasons that their former owners had trouble paying the mortgages. The bad economy means commercial property owners are having a hard time filling vacancies in their buildings, which in turn means they aren't making the revenue they need to pay their loans. This, in turn, means there just isn't a lot of money in commercial real estate right now. The bad economy also depresses commercial real estate prices, which could attract investors -- but only those who are willing to take on some risk.

Continue reading "Hotel Seller's Study Says More California Hotels Are in Financial Distress" »

Our Redlands commercial real estate loan modification attorneys have been writing a lot this year about the dire predictions for the commercial real estate market. On June 9, Fortune magazine ran an article outlining those predictions and contrasting them with the optimistic view taken by other observers. In fact, the article starts by posing a question: Where is the commercial real estate crash that was predicted? It gives a lot of potential answers to that question, depending on the observer's perspective as well as the segment of the market being examined. But in the end, the article notes that commercial real estate has a tough road ahead even if investors are optimistic.

The article starts with non-securitized CRE loans. In that area, some observers -- notably including Elizabeth Warren, TARP committee chair and financial watchdog for the Obama administration -- are predicting a market meltdown that will trigger failures of small to mid-sized banks with too many investments in bad assets. On the other side are people who believe the market will bottom out rather than collapse, thanks in part to government intervention. Investors are also helping themselves by finding creative ways to restructure their debts, and some investors are eager to get back into the market while prices are still low. Meanwhile, investors in commercial mortgage-backed securities have more to worry about, the article suggested, because a great many of them written during the boom years have low ratings. And speculative commercial loans not backed by assets, such as construction loans, are also risky and have already contributed to bank failures.

As Newport Beach commercial real estate loan modification lawyers, we hope the optimists are right. We and our clients would prefer an economic recovery to another real estate crash, especially one involving loans big enough to bring down banks. If you are looking for reasons to be hopeful, this article might give you some reasons, especially as to conventional, non-securitized CRE loans. However, a commercial real estate recovery relies on investors to make smart choices -- and on lenders to allow some out-of-the-ordinary financial moves. In our role as loan modification attorneys throughout the residential mortgage crisis, we saw repeatedly that lenders did not want to do anything they considered risky or a threat to their bottom lines, even if it made long-term sense for both parties.

Continue reading "Report Outlines Optimism and Pessimism in Commercial Real Estate Market" »

Over the past few months, our Riverside commercial real estate loan modification attorneys have written repeatedly about financial-industry predictions for the commercial real estate market. Almost none of those predictions have been good in 2010. In a June 10 article, Dow Jones Newswires notes yet another black outlook on the commercial real estate market, specifically in commercial mortgage-backed securities. The prediction comes from Moody's Investors Service, which has revised its original estimate that 8 to 9 percent of loans on CMBS will be delinquent by the end of the year. Following to a small jump in delinquencies in May, Moody's now predicts that 9 to 11 percent of CMBS will be delinquent by the end of 2010.

Last month's jump was from 7 percent delinquency to 7.5 percent delinquency. This may not seem like much, but it follows two months of modest declines, which gave some observers hope that the commercial real estate market was making a comeback. The article says Moody's revised its prediction to account for continuing high rates of unemployment, as well as the economic troubles in Europe that may have effects on the U.S. market. This is in addition to the existing troubles in the CRE market, which has been suffering for more than a year. Moody's Analyst Nick Levidy said some sectors of the CRE market are showing signs of improvement, while others bear the brunt of the downturn. The highest delinquency rates in May were in hotels and multifamily housing, both of which had default rates at 13 percent. But office properties saw the highest jump in delinquencies, from 4.6 percent to 5.6 percent. Regionally, the highest delinquency rates are here in the West.

As Costa Mesa commercial real estate loan modification lawyers, we're not surprised to see that the West is hurting. California, Arizona and Nevada could be considered the troubled residential mortgage capital of the U.S. (with Florida competing). Assuming that troubled residential mortgages spring from general economic troubles like unemployment, it makes sense that the commercial sectors in the same region would also be affected. In fact, the Dow Jones article notes that Nevada is the state with the most CMBS delinquencies, at 23 percent. That is, nearly a quarter of all commercial properties in Nevada are in foreclosure or heading that direction. In addition to harming the property buyer and the general economy, this can also hurt the stability of the lender, which of course is not getting paid back on its loan. If widespread enough, this could hurt the economic recovery for everyone.

Continue reading "Investment Ratings Company Issues Grim Revised Predictions for CMBS Market " »

As Riverside commercial real estate loan modification attorneys, we've been following the news about commercial mortgage-backed securities for the same reasons we follow news about unsecuritized commercial loans. Unfortunately, that news continues to be grim. According to a June 2 article from the Wall Street Journal, financial ratings company Fitch released a study that day showing that investors in CMBS lost an average of 57% of their principal in 2009 in mortgages that were foreclosed on or sold. That's much higher than the historical average of 37%, the newspaper said. Worse, Fitch's study predicts that this rate will exceed the historical average throughout this year and into next year, creating severe losses for investors.

The problems with CMBS are the same as the problems with the commercial real estate market generally, the article said. With the economy struggling, many tenants are giving up their office space or negotiating breaks on rent. That means property owners are having problems finding tenants at all, retaining them and charging enough rent to cover costs. At the same time, buildings are losing their value because all real estate is losing its value. This leaves some building owners underwater on their loans, which means they can't refinance when the loan comes due -- or when they find that they don't have enough income to pay off the loan in the first place. All of these factors contributed to a delinquency rate of about 8.4% in June, the article said -- more than triple the rate from a year earlier. And that creates the very high loss severity rate projected by Fitch for CMBS this year and next year.

Our Los Angeles County commercial real estate loan modification lawyers are not pleased, but also not surprised. We have watched commercial real estate throughout the year. Ratings agencies -- and real-life data -- have consistently shown heavy losses in CRE, for all the same reasons discussed above. It's not surprising that this would eventually affect the investments of securitized CRE, just as the subprime mortgage crisis in the residential housing market has affected investments in securitized mortgages. The question is, what will lenders do about this? Residential mortgage lenders have not been enthusiastic about helping struggling borrowers reach a loan modification, and many have, correctly or otherwise, blamed securitization for blocking the way. If lenders have similar problems modifying securitized CRE loans, however, they run the risk of major losses that could bring down a small to mid-sized bank.

Continue reading "Ratings Company Predicts Record Losses in Commercial Mortgage-Backed Securities" »

Our San Bernardino commercial loan modification attorneys have been writing all year about negative predictions for the U.S. commercial real estate market. So we weren't surprised to see a May 24 article from Reuters with more bad news about the likely course of the market for commercial mortgages held by banks, not counting mortgages on apartment buildings. The study by Real Capital Analytics predicts a record high number of defaults on these loans in 2010, with the peak number defaulting in 2011. The company predicts serious trouble for the banks that hold those mortgages, with defaults causing banks to lose so much money that smaller banks could be in serious trouble.

Real Capital Analytics said the rate of default on commercial mortgages in the first quarter of 2010 hit its highest level since at least 1992. That rate was 4.17% in the first quarter, or $45.5 billion, up from 3.83% in the fourth quarter of 2009. The 2011 peak is predicted at 5.4%. Like other analysts, Real Capital Analytics blames the bad economy, which has caused buildings' values to plummet, created high vacancy rates and lowered rents. One expert quoted in the article said leases signed a few years ago are expiring, and those tenants are likely to negotiate even lower rents, further depressing commercial real estate companies' ability to pay off their loans. About 50.2% of commercial loans were from small or mid-sized lenders, the study found, although the mortgage default rate at those institutions is lower than the default rate at bigger lenders.

As Irvine commercial loan modification lawyers, we've seen a version of this prediction before. Elizabeth Warren, the head of the Congressional Oversight Panel watching how the TARP "bailout" money is being used, predicted in late March that small to mid-sized banks could fail within the next year if they have "dangerous concentrations" of commercial loans that go into default. She also observed that the rate of underwater commercial loans is very high. In our experience, being underwater doesn't mean default is inevitable -- but it's a strong indicator that a default is coming. Many of the same conditions that create an underwater mortgage loan are conditions of a bad economy generally, which means owners of underwater loans are also dealing with less income with which to pay off that loan. And of course, owing more than the building is worth can drive some borrowers to walk away from the loan.

Continue reading "Study Predicts Record Number of Defaults on Commercial Mortgage Backed Securities" »

Federal rules could change the bleak landscape for commercial real estate investors who are currently underwater, Inside Tucson Business reported May 7. Our Ontario commercial loan modification attorneys were extremely interested to read about this underpublicized rule, which could make life easier for owners in the troubled CRE market. According to the article, a joint policy statement was issued in October and reissued in February by the Federal Reserve Board, the FDIC and other federal regulators. It says borrowers in a "deteriorating financial condition" who are still current on loan payments and willing to repay their loans should still be considered creditworthy borrowers. And as creditworthy borrowers, the statement said, they should not be subject to "adverse classification solely because" they are underwater.

An increasing number of CRE owners are underwater, which means their loans are worth more than the value of their buildings. Earlier this year, Elizabeth Warren, the chair of the Congressional Oversight Panel watching the financial industry "bailout," predicted that half of all U.S. CRE would be underwater by the end of this year. This is a problem, the article noted, because lenders can generally demand repayment when loans dip underwater. That can cause serious problems for borrowers who are losing rental or lease income in the recession. Experts said the rule should stop lenders from writing down loans solely because of the buildings' appraisals, which banks may do because it allows them to add to their cash reserves. However, multiple experts added that banks have generally been ignoring the rule, foreclosing or demanding full payment from borrowers who are still making payments on time.

As Santa Ana commercial real estate loan modification lawyers, we're disappointed but not surprised to see so many people with the same complaint about lenders' behavior. In our experience, lenders have repeatedly placed their short-term financial needs ahead of the most sensible long-term goal, as well as the needs of their clients. We saw this in the residential real estate crisis, in which foreclosures soared despite the financial losses and maintenance obligations they created for banks. Now, we're seeing lenders in the commercial arena foreclose on viable loans. The article suggests that this is motivated by lenders' need to liquidate their assets. By demanding repayment, lenders force properties into default or siphon all of the capital out of the investors who still have it. They also take on yet another foreclosure at a time when CRE prices are very low.

Continue reading "Experts Say Federal Policy Could Stop or Slow Commercial Real Estate Foreclosures" »

Our Riverside commercial real estate loan modification attorneys wrote recently about a report that commercial mortgage-backed securities are likely to default in record numbers this year. The private data firm Trepp LLC has just come out with a report bolstering that grim prediction using data from this past month. National Real Estate Investor reported May 4 that April saw a delinquency rate of 8.02% among CMBS, according to Trepp. That number is a massive increase from April of 2009, which saw a delinquency rate of 2.45%. CMBS, like residential mortgage-backed securities, are investments in "bundled" real estate loans, but the loans are higher in value because they represent commercial buildings.

The article said the jump in delinquent CMBS was actually not as steep in April as it was in March. However, nearly half of the basis points used to determine March's delinquencies can be attributed to the default on the loan for Stuyvesant Town, a massive New York City development whose default was widely reported. The 8.02% number includes loans that are REO, in foreclosure or at least 30 days overdue. However, the article also broke down the rate of loans that are "seriously delinquent" because they are more than 60 days overdue. That default rate was more than 7% in April, the article said, up sharply from 1.78% in April of 2009 and 3.91% six months ago. The sector of commercial real estate with the highest delinquency rate was lodging, which had a 17.16% default rate this year and a 2.63% default rate a year earlier.

As San Bernardino commercial real estate loan modification lawyers, we're not surprised to see that lodging is suffering so much. In a recession, hotels and the travel industry will inevitably see fewer customers because individuals have less money to spare. However, the problems in commercial real estate extend to every type of building mentioned in the article, all of which had a delinquency rate above 5% and well above their rates from a year before. In the bad economy, even office and apartment buildings aren't always able to make enough money to pay off their loans, especially loans made at the height of the commercial real estate bubble. This is bad news for everyone, because the crash of the commercial real estate market may well take small banks with it, as lenders and investors lose the money they poured into commercial buildings during better times.

Continue reading "Private Data Firm Finds Delinquency Rate for CMBS Hit Historic High in April" »

A Wall Street Journal article on securitized commercial loans caught the attention of our Riverside commercial real estate loan modification attorneys. On April 21, the Journal reported that defaults are reaching a record high among commercial real estate loans that have been packaged into securities. Fitch Ratings reports that 11% of such loans are expected to be past due by the end of 2010, and 7% are already seeing late payments. Before the market crashed, the default rate was less than 1%. The newspaper blames the default rate on falling or missing rent payments as well as the inability to refinance because there's no market for new commercial mortgage-backed securities.

Like their residential counterparts, commercial mortgage-backed securities are bundled and sold to investors who then have a small interest in a variety of loans. Interestingly, however, the Journal reported that special loan servicers handle commercial mortgage-backed securities whose underlying loans are in trouble. The newspaper said $70 billion in commercial loans are in the hands of such companies, and Deutsche Bank AG estimates that servicers have restructured $13.7 billion worth of those loans. One modification strategy the article cited was the practice of dividing mortgages into "good" and "bad" pieces, then allowing the borrower to pay only the good part of the loan until it matures, at which time the bad part comes due. Investors in the bad part delay or, less commonly, avoid taking a hit. Supporters say is in everyone's best interest compared to taking the losses from a foreclosure and liquidation.

As Los Angeles commercial real estate loan modification lawyers, we always thought this was true --of both residential and commercial loans. However, we suspected that many lenders disagree, at least in the arena of non-securitized CRE loans. In the residential real estate market, securitization was blamed for lenders' reluctance to perform loan modifications, because lenders had trouble getting agreement from every investor. It would be ironic if securitization was actually an advantage in the commercial market. It's unclear why investors in the bad part of a divided loan are willing to risk losing their investments, but the situation could be very helpful for commercial investors who are suffering, allowing them to add another weapon to their arsenal for negotiating a loan modification.

Continue reading "Commercial Real Estate Loans Packaged Into Securities Defaulting in Record Numbers" »