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Commercial Real Estate Loans Packaged Into Securities Defaulting in Record Numbers

April 21, 2010

A Wall Street Journal article on securitized commercial loans caught the attention of our Riverside commercial real estate loan modification attorneys. On April 21, the Journal reported that defaults are reaching a record high among commercial real estate loans that have been packaged into securities. Fitch Ratings reports that 11% of such loans are expected to be past due by the end of 2010, and 7% are already seeing late payments. Before the market crashed, the default rate was less than 1%. The newspaper blames the default rate on falling or missing rent payments as well as the inability to refinance because there's no market for new commercial mortgage-backed securities.

Like their residential counterparts, commercial mortgage-backed securities are bundled and sold to investors who then have a small interest in a variety of loans. Interestingly, however, the Journal reported that special loan servicers handle commercial mortgage-backed securities whose underlying loans are in trouble. The newspaper said $70 billion in commercial loans are in the hands of such companies, and Deutsche Bank AG estimates that servicers have restructured $13.7 billion worth of those loans. One modification strategy the article cited was the practice of dividing mortgages into "good" and "bad" pieces, then allowing the borrower to pay only the good part of the loan until it matures, at which time the bad part comes due. Investors in the bad part delay or, less commonly, avoid taking a hit. Supporters say is in everyone's best interest compared to taking the losses from a foreclosure and liquidation.

As Los Angeles commercial real estate loan modification lawyers, we always thought this was true --of both residential and commercial loans. However, we suspected that many lenders disagree, at least in the arena of non-securitized CRE loans. In the residential real estate market, securitization was blamed for lenders' reluctance to perform loan modifications, because lenders had trouble getting agreement from every investor. It would be ironic if securitization was actually an advantage in the commercial market. It's unclear why investors in the bad part of a divided loan are willing to risk losing their investments, but the situation could be very helpful for commercial investors who are suffering, allowing them to add another weapon to their arsenal for negotiating a loan modification.

Howard Law PC represents investors in commercial real estate properties who are seeking to negotiate a modification to their loans. As the article notes, more and more CRE borrowers are facing default or the prospect of default, thanks to the bad economy. Tenants are scarce, rents are down and some tenants are simply not paying rent because their businesses cannot afford it, which squeezes CRE companies' cash flow. At the same time, real estate values are still low, often much lower than they were when the property was originally purchased. This means that CRE companies can't simply refinance when their loans come due. Our Irvine commercial real estate loan modification attorneys help investors deal with this situation by negotiating loan modifications, including changes to interest rates and loan maturities as well as complex debt-splitting schemes.

If you're a commercial real estate investor and you need help negotiating a fair loan workout to protect your investment, Howard Law can help. To set up a free, confidential evaluation of your case, please contact us online or call 1-800-872-5925 today.