Banks and Special Servicers Brace for a Deluge - And Loan
Sales Can Help
stores, offices, warehouses, and hotels shuttering over the past few weeks as a
result of the coronavirus pandemic, it is only a matter of time before
businesses will be unable to pay their rent and fulfill their payment
Such a situation has prompted the dire need to seek out
financial relief programs for commercial
mortgage-backed securities, pointing to a crisis in the real estate
Commercial Loan Assets a
Source of Significant Delinquencies
Nearly $150 billion in commercial loans that are in commercial
mortgage backed security form - representing 26 percent of the outstanding debt
- is involved in deferred payments over recent weeks. Compare that to the weeks
following the last financial crisis, whereby loan delinquencies and
foreclosures reached a peak of 9 percent. That's a significant difference and
one that has bank special servicers very concerned.
Lenders with potentially weak and risky commercial loans are
preparing for what may just be a massive dent in their business. A slew of
defaults, possible foreclosures, and modification requisitions are expected to
pour in. After years of scaling back in workout staff, they're starting to beef
up again to brace for what's to come.
While not all commercial borrowers who requested forbearance
will necessarily end up being delinquent or enter foreclosure, it's estimated
that the $584 billion industry will reach peak levels not seen since 2011 by as
early as Q3 2020.
The hotel industry has been hit particularly
hard, with travelers staying put in an effort to curb the spread of COVID-19.
Up until now, residential real estate mortgages have seen
mortgage deferral options to provide financial relief for homeowners who may
not be able to make good on their home loan payments for a few weeks following
lay-offs and business closures. But no such government relief programs exist
for commercial real estate.
Commercial Lenders Need to
Embrace Loan Sales as a Way to Hedge Against Risk
Although banks and lenders may have some wiggle room to
negotiate modifications to payment plans on commercial property, the options
are limited. Bank special servicers are already seeing mounting debt being
transferred to them from master servicers and lenders.
The profit that bank special servicers make comes from fees
charged on the unpaid principal portion of the loans they hold. But as these
servicers get overwhelmed with volume, loan defaults start to occur with higher
Among all the commercial loan issues, those involving hotels
have been hit particularly hard as would-be travelers stay home. Over 20
percent of commercial lodging loans were up to 30 days late in April, a 1.5
percent uptick from the month before. Retail debt is also seeing a spike in
late payments over the past month.
While the financial crisis from over a decade ago came with its
own trials and tribulations, this one is quite unique. Banks and commercial
special servicers will need to turn to loan sales as a means of moving product
through the resolution process more quickly. With the help of a seasoned loan
sale advisor like Garnet Capital, loan sales can help stressed servicing units
during this time of crisis and serve as a tool for loan management.