NEW YORK, June 9 (Reuters) - U.S. commercial real estate mortgage servicers are seeking to extend maturing loans for up to five years in a bid to prevent borrowers from defaulting and giving up office, retail and apartment buildings at distressed levels, an industry executive said on Tuesday.
The moves by special servicers, which oversee mortgages in or near default, would sharply increase the maturity of the loans from the six- to 12-month extensions commonly negotiated today, John D’Amico, a senior managing director at Centerline Capital Group, told Reuters after a panel hosted by the Commercial Mortgage Securities Association in New York.
Modifying loans has consumed the $700 billion market for commercial mortgage securities this year. Frozen credit markets have limited refinancings for maturing loans in commercial mortgage-backed securities, resulting in a wave of defaults and exacerbating the impact of the U.S. economic recession.
Loans coming due in CMBS will grow to $42 billion in 2010 and $69 billion in 2011, from $15 billion this year, according to Credit Suisse.
The urgency has also risen since the fourth quarter of 2008 as special servicers have taken on hundreds of new loans due to default or a reduction in cash flow that may presage a default. The balance of troubled commercial real estate loans soared 48 percent last quarter to $23.7 billion, and will surely grow due to the April bankruptcy filing by No. 2 U.S. mall owner General Growth Properties Inc., according to Fitch Ratings.
FIGHTING FOR TIME
The loan “workout” process has often turned “nasty” as servicers try to hammer out terms agreeable to a variety of borrowers, lenders and investors that will limit losses and prevent foreclosures, a lawyer said at the CMSA conference on Monday. Among sticking points, lenders often demand borrowers put up additional equity, and the extensions add risk for CMBS investors because it delays return of their principal.
But with property prices falling and outlooks dire, parties are coming to terms with longer extensions, D’Amico said.
“I think we will see more cases where people will put more (equity) in the properties” to get extensions of up to five years, D’Amico said.
Investors worried about extension risk to their securities are finding alternatives like foreclosure are unpalatable if an extension isn’t negotiated, he said. In April, General Growth Properties blamed its bankruptcy filing in part on CMBS investors that impeded its ability to reach new financing agreements for billions of dollars in maturing debt.
CMBS losses after foreclosure have doubled to 72 percent this year compared to CMBS liquidations in previous years, Credit Suisse said in a client note. Of 14 loans liquidated with losses in May, nine had a loss “severity” between 50 percent and 100 percent.
“I would love to get back (principal) quicker, but I don’t want to put a gun to their heads to force them to sell property at distressed levels,” said one investor on a CMSA panel. “This is not the market to start tipping dominoes.”
If extension negotiations fail, servicers are trying to smooth the way for buyers of foreclosed properties to assume existing loans. This would require a change in tax law.
But bondholders -- including Blackrock Inc and MetLife Inc -- have objected to such financing, saying it gives buyers a subsidy at their expense. Requests of servicers to cap the length of the loan, and for buyers to post at least 25 percent equity in the property to mitigate risks, are all being discussed in negotiations, D’Amico said.
“There’s been a lot of progress” in finding a middle ground acceptable to both servicers and investors, he said.
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