With half of all US commercial real estate mortgages expected to be underwater by the end of the year, commercial mortgage lenders are starting to be more open to modifying existing agreements with borrowers. Delinquency rates for commercial mortgage-backed securities continued to rise in February and could soon reach into the double digits. See the following article from HousingWire for more on this.
Kevin Levine, executive vice president of Strategic Asset Services (SAS) said commercial mortgage lenders in the US are beginning to see the need to enter into modifications agreements with borrowers.
Based in California, SAS offers commercial loan modification services in throughout the country. When it first began offering the services in early 2009, many lenders, Levine said, were reluctant to face the seriousness of the problems and modify the loans.
“But,” he said, “in the past several months, that recognition has increased dramatically. As a result, we find more and more banks and other lenders welcoming our services on behalf of their borrowers.”
Elizabeth Warren, chairperson for the TARP Congressional Oversight Panel, said in an interview Monday that by the end of 2010, half of all commercial real estate mortgages will be underwater – with most of the loans concentrated in mid-sized banks.
On the secondary side, the delinquency rate on commercial mortgage-backed securities (CMBS) pools reached 6% in February, up from 5.7% in January, according to the analytics firm Realpoint. That number, though, could reach into double digits, even as high as 12%.
To combat the oncoming wave of trouble, Ben Bernanke, chairman of the Federal Reserve, said in a speech to the House of Representatives Committee on Financial Services that although the Term Asset-Backed Securities Loan Facility (TALF) will reach its end this month, newly issued CMBS and loans backed by new CMBS will get an extra three months.
This “pretend and extend” strategy, as Robert O’Brien, US Real Estate Leader at Deloitte, called it, is the best option until hungry investors bring capital back to the market.
Meanwhile, SAS is seeking an uptick in business as tenants file out of office buildings, retail centers and multifamily spaces. Unless the loans are modified, banks must begin foreclosure proceedings. For many lenders, however, the balance sheets are starting to strain.
“We saw the same initial reluctance of the residential lenders to work with their borrowers and modify their stressed home loans several years ago,” Levine said. “But just as the residential lenders were forced by declining circumstances to cooperate with the home owners, so the commercial lenders are now being compelled to negotiate with their borrowers.”
He reiterated that it is preferable for them to have a paying asset, even at a reduced return than go through the expensive foreclosure process.
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