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Study Predicts Record Number of Defaults on Commercial Mortgage Backed Securities

May 26, 2010

Our San Bernardino commercial loan modification attorneys have been writing all year about negative predictions for the U.S. commercial real estate market. So we weren't surprised to see a May 24 article from Reuters with more bad news about the likely course of the market for commercial mortgages held by banks, not counting mortgages on apartment buildings. The study by Real Capital Analytics predicts a record high number of defaults on these loans in 2010, with the peak number defaulting in 2011. The company predicts serious trouble for the banks that hold those mortgages, with defaults causing banks to lose so much money that smaller banks could be in serious trouble.

Real Capital Analytics said the rate of default on commercial mortgages in the first quarter of 2010 hit its highest level since at least 1992. That rate was 4.17% in the first quarter, or $45.5 billion, up from 3.83% in the fourth quarter of 2009. The 2011 peak is predicted at 5.4%. Like other analysts, Real Capital Analytics blames the bad economy, which has caused buildings' values to plummet, created high vacancy rates and lowered rents. One expert quoted in the article said leases signed a few years ago are expiring, and those tenants are likely to negotiate even lower rents, further depressing commercial real estate companies' ability to pay off their loans. About 50.2% of commercial loans were from small or mid-sized lenders, the study found, although the mortgage default rate at those institutions is lower than the default rate at bigger lenders.

As Irvine commercial loan modification lawyers, we've seen a version of this prediction before. Elizabeth Warren, the head of the Congressional Oversight Panel watching how the TARP "bailout" money is being used, predicted in late March that small to mid-sized banks could fail within the next year if they have "dangerous concentrations" of commercial loans that go into default. She also observed that the rate of underwater commercial loans is very high. In our experience, being underwater doesn't mean default is inevitable -- but it's a strong indicator that a default is coming. Many of the same conditions that create an underwater mortgage loan are conditions of a bad economy generally, which means owners of underwater loans are also dealing with less income with which to pay off that loan. And of course, owing more than the building is worth can drive some borrowers to walk away from the loan.

Howard Law PC represents commercial real estate owners who are looking for a better solution -- a modification to their commercial loans. If the predictions of threats to banks' stability are correct, we suspect banks will want to ensure they get something back on their investments. For that reason, we believe lenders may be extremely interested in granting loan workouts to commercial real estate investors. Our Del Mar commercial real estate loan modification attorneys can help borrowers negotiate extensions to their loans, changes to interest rates or even principal write-downs. We have had some success negotiating similar changes to residential mortgages written at the height of the market, and will fight for a deal that allows our clients to retain their investments and the lenders to avoid large writedowns.

If you're a commercial real estate investor stuck with a loan written at the height of the market, you should talk to Howard Law about a commercial real estate loan modification. To set up a free consultation, call us today at 1-800-872-5925 or send us an email through our website.