Lax underwriting standards prior to the recession led to an unprecedented number of commercial mortgage backed securities being issued. This year many of these property owners will need to refinance, but this presents unique challenges as the lending environment has changed over the last ten years.
An unprecedented number of CMBS securities were minted prior to the recession. In 2007 alone 230 billion in CMBS mortgages were originated. According to Trepp, 41.7 billion of these mortgages will need to close or refinance by November of this year. These mortgages were issued at extremely high loan to value ratios, with terms which would be impossible to secure today. Unfortunately for borrowers who took on these loans, many will need to refinance this year and will likely incur large out of pocket expenses as a result. Today’s strict underwriting standards mean that refinancing may be very difficult or very expensive for some of these commercial property owners.
The owners of these properties, who took out mortgages in the run up to the recession, will likely need to refinance by the end of the year. In the best case scenario a borrower could get a new mortgage at 80 percent of their properties current market value. Their initial mortgage might have been made at up to 96 percent of their properties value. With stricter underwriting standards, some borrowers could find refinancing a very expensive proposition. For example, a borrower might have gotten a 3.6 million dollar CMBS loan on their 4 million dollar property in 2007. With today’s underwriting standards, in the best case the owner would only get a mortgage for 3.2 million. Meaning in order to refinance the owner would have to pay 400,000 dollars out of pocket.
Commercial mortgage borrowers could avoid the expense of refinancing by selling their property, but this result in its own challenges.
With so many pre crisis CMBS loans currently maturing, borrowers may need to sell off their properties quickly. Simply put the sale must go through before the loan fully matures. This is difficult in consideration of just long it can take to sell a property. Selling any property can take at least 6 months and the sale of real estate usually involves a great deal of negotiation between buyers and sellers. The longer it takes to sell the property, the greater the chance of default. If a sale can’t be secured before a loan matures, the borrower will need an extension or their loan may become delinquent. The holders of these pre crisis CMBS loans also need to ensure that the value of their property is sufficient to pay off their outstanding mortgage.
Even in the face of these many challenges borrowers holding these commercial mortgages have been defaulting at a lower rate.
Since March of 2016 and June of this year, as many analysts expected delinquencies on pre-crisis CMBS loans climbed to new heights. These numbers rose at least 13 times over this period. The height delinquencies came in July of 2012, when 10.34 percent of outstanding CMBS loans were in default. In September the number of CMBS mortgages in default was still 62 basis points higher than at the same time last year. However these numbers show some improvement according to analysts and have declined by some 4 basis points since August. “After more than two years, the ‘wave of maturities’ has been reduced to a mere ripple,” according to Manus Clancy, Senior Managing Director at Trepp. “The volume of maturing debt coming due every month has already begun to wane, meaning the rate of delinquent loans should hold steady or recede in the coming months.” The data indicates borrowers have resolved some of the challenges of refinancing or selling their properties. How this situation will play out for the rest of the year remains uncertain.
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.