Servicers Face Flood of Forbearance Pleas
Commercial MBS servicers, awash in forbearance requests, believe loan reserves could play a key role in helping borrowers weather the coronavirus crisis.
Facing hordes of borrowers whose property cashflows have been crushed by the pandemic, servicers are under pressure to come up with an efficient way to handle missed payments without transferring loans to special servicing en masse. One strategy that appears to be gaining traction: allowing borrowers to divert funds set aside for capital projects and the like to cover debt service for up to 90 days. In addition, certain property-performance requirements could be suspended during that period.
The advantage of such a tactic is that it “can be implemented fairly quickly without the loan being transferred to the special servicer” — a costly and time-consuming process for borrowers, one servicing executive said.
Troubled borrowers often seek permission to tap loan reserves to avoid missing a payment. The process usually is managed by the master or primary servicer with approval from the special servicer, which has sole authority to grant forbearance and work out troubled loans. Once the crisis is over and borrowers can resume regular payments, they would have a year to replenish their reserves via 12 monthly installments.
Funds eligible for such treatment include those set aside for capital projects, tenant improvements, leasing expenses and repairs. Reserves held to meet certain legal obligations, such as taxes and insurance premiums, can’t be diverted.
Market pros point out that some loans don’t have sufficient eligible reserves. And before approving the maneuver, a servicer would have to determine whether a borrower has longer-term cashflow problems or other issues that would necessitate involving the special servicer.
CMBS pooling-and-servicing agreements also must be consulted, because some “have more-defined transfer events and some have provisions where the special servicer can review a matter and delegate the processing of that matter to a master servicer,” another servicing pro said. Still, “I don’t think anybody is forcing the issue so that there’s a transfer to special servicing” unless absolutely necessary, he said.
Given the flood of forbearance requests, some are hoping CMBS servicers will institute a blanket policy for suspending loan payments if borrowers meet certain broad criteria. While that’s effectively the case for multi-family loans in Fannie Mae and Freddie Mac securitizations, servicers said requests to delay or skip payments on mortgages in private-label deals must be weighed on a case-by-case basis.
“It’s not feasible to come up with a one-size-fits-all model” for loans in private-label transactions, one servicing veteran said. That’s partly because they include a much wider variety of property types, loan structures and credit profiles, he added.
Meanwhile, banks that hold commercial mortgages on their balance sheets are holding off so far on taking any immediate action against delinquent borrowers. They first want to get a better handle on rent collections — and to what extent the pandemic has depressed borrowers’ net operating income.
Several bankers acknowledged feeling daunted by the prospect of initiating talks with scores of borrowers about the status of potentially hundreds of mortgages.
“It’s going to be a massive internal time suck,” one lender said. Setting up protocols for managing borrower requests and making preliminary assessments is akin to triage in an emergency room, he added.
“We’re really limiting and restricting any new activity on the financing side and going through the portfolio and working with borrowers on a case-by-case basis,” another originator said. “It’s kind of like, overnight, you went from new business to portfolio management.”
Evaluating loans impacted by the coronavirus crisis presents an unprecedented burden for balance-sheet lenders. “Everyone is preparing for negotiations with clients to the extent it makes sense to work with them,” a bank executive said.
The expectation is that office and industrial properties will be moderately affected. But retail-property cashflows already are “a disaster,” as one source put it. Newmark said earlier this week that a survey of its clients showed retail rent collections were a dismal 35% for April.
Some banks appear to be taking a wait-and-see approach to distressed borrowers as their tenants apply for government relief. Smaller businesses may qualify for the Small Business Administration’s Paycheck Protection Program, which provides up to $10 million of forgivable loans to cover costs that include rent. “This is huge for many of our borrowers,” another originator said.
The terms of CMBS mortgages often prohibit borrowers from taking on additional debt, but some appear to have applied for and obtained SBA loans anyway. While “that could trigger a non-monetary default, we’re not likely to take a heavy-handed approach to something like that,” a senior servicing pro said. “You can only really go after somebody if you can prove damages.”
As of yesterday, the $349 billion Paycheck Protection Program had run out of money and no longer is accepting applications.