Commercial mortgage-backed securities (CMBS loans) are bonds designed to finance investments on commercial loan portfolios and sold to investors worldwide. The income from such property is passed on from the property owner to the bond holder. The high-income yielding CMBS market went through a severe downturn in 2008, followed by a gradual period of recovery from 2010 onwards according to a report in the National Mortgage Professional Magazine.
Intricacies of Mortgage Modifications on CMBS loans
According to a report published in the same magazine mentioned above, the commercial mortgage modification industry evolved in the aftermath of the 2008 real estate market seizure and has become integral to the market recovery process now.
Unlike the residential modification business, a commercial modification is more complex. It involves detailed negotiations, intensive market research, comprehensive data collection, discovery, verification, reporting, and astute financial analysis. Every individual case of commercial loan modification is unique, requiring a customized solution.
Potential Outcomes of Commercial Modification
Some of the most plausible outcomes of a commercial modification may include the following:
Extension of Loan Term
If a loan cannot be refinanced due to the high loan-to-value (LTV), but the cash flow is adequate for debt servicing, the lender may agree to the extend the maturity on the loan. This is a fairly simple type of commercial modification, which can be executed quickly and smoothly.
This is usually a complicated transaction, and most lenders may not be easily willing to walk down that road. The reason is that this type of transaction can often bring down the asset value on the books of the lender.
This type of a transaction is typically carried out in relation to a short refinance or short sale. In this case, the lender accepts less than the full value of the loan in order to settle the debt. The principal will not be reduced by the lender in order to enable the property owner to make a profit.
New Equity Partnership
The lender will usually be more agreeable to working with a borrower that is ready to release equity in the commercial property to a new investor that enters the room with cash.
When an individual commercial borrower is in bankruptcy, the situation can be dealt with differently than in the case of residential property. The judge can reduce the principal or modify other terms of the mortgage.
Common Items of Renegotiation in Commercial Modification
A commercial loan modifications specialist writing online for the GFCIB and Advisors LLC recommends a review of the following issues in a commercial mortgage modification:
- Principal Balance: Whether the property has more debt on it than its existing market value.
- Interest Rate: Whether the current rate is justifiable in supporting the property.
- Maturity Date: Whether it is possible to pay off the loan by the existing maturity date.
- Amortizing period or to interest only.
- Personal Guarantees: Whether it is possible to release or limit them.
- Need for Cash: Whether money is needed for capital improvements or other purposes.
- Monthly Installment: Whether the amount of monthly payment is feasible.
- Review of Technical Default Reasons/Covenants to steer clear of any future complications.
- Short Sale: Whether it can be done with or without a release of Personal Guarantees.
- Evaluation of the credibility and strength of the Guarantors.
Whether a lender will agree to a commercial mortgage modification or not is usually more than the mere economic aspects of the case. While security and profitability are the prime motives of the lender, but in many cases, other factors too have a vital role to play.
These may include external pressure from the regulators, perspectives of the key stakeholders, and the trend followed by other lenders. What goes on behind the scenes can be just as crucial. It is also important to know whether the loan can be classified as a TRD or a classified asset, and how it may impact the lender’s decision.
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