As commercial real estate loan defaults increase, the need for commercial loan workout solutions offered by lenders to remedy the situation will also increase. Several factors seems to support this view.
An excellent online article written by Gene Fisch, Jr. and Archana Sivadasan
at Roubini.com states that "shorter loan maturities, inability to refinance, rate resets, and weak economy
are several of the major factors which affect the scale and breadth of CRE loan defaults." With slow improvement in the economy, The next shoe to drop, commercial real estate could delay a full recovery. Commercial loan workouts may be in the lender's best interest to keep "in the black".
There are basically two types of commercial lenders: Lenders, such as banks and life insurance companies, who keep portfolios of loans they originated and lenders who are "conduits", who package pools of commercial mortgages into "CMBS", or Commercial Mortgage-Backed Securities, to be sold to the investment market. Portfolio lenders are easier to obtain a commercial workout, due to the fact they retain originated loans. Conduit lenders sell their mortgages to investors, and if borrowers default on their commercial mortgages, the loan most likely will be transferred to a "special servicer". Special servicers, manage troubled loan assets on behalf of investors that are nearing default, or currently are in default. Commercial loan workouts must go through these special servicers for CMBS type loans. Striking Differences in Commercial and Residential Mortgage Products
The Roubini.com CRE default article
made this observation: "Unlike residential loans, which have 15 to 30 year maturities, loans on existing commercial properties have shorter durations with 3 to 10 years and a final balloon payment at the end of the term. As a result, CRE loans generally require refinancing to be paid off. Residential borrowers, who meet their monthly debt service, do not have the obligation to refinance. They could pay off the loans completely at maturity. Commercial borrowers, facing shorter loan maturities and balloon payments, must refinance in order to avoid default." So even if a commercial borrower has excellent credit, the chances of obtaining refinancing are slim, especially if their commercial property is underwater.
As an alterative solution to defaulting, or losing their Commercial property, borrowers can apply for a commercial loan workout to restructure current loan terms, reset balloon payments, lower interest and/or principal payments and even set up a payment plan. But borrowers don't have to wait until they default. Borrowers who know down the road their cash flow will decrease and financial hardship will follow can apply for a commercial loan workout.
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