Fact: According to Trepp Wire, April’s delinquency for CMBS was a record jump in %. What is even more alarming is the fact that there was new volume added in the last quarter of 2010, which usually dilutes the delinquency number because new loans don’t have a chance of being delinquent.
In a CMBS scenario, the lender sells the loan off to a pool that spreads the risk. Usually a bond is issued to create this pool, and investors who hold the bond are sharing the risk (check exact definition for yourself). The problem with this is that the originating bank has less at risk and is therefore less motivated to keep a mortgage from going into foreclosure. It creates an almost apathetic attitude.
To worsen things, the loan is typically serviced by a separate servicing organization. ORIX, CW Capital, LNR Partners, C3, are some of the larger servicers. These servicers have a definite conflict of interest when it comes to the fiduciary responsibility transferred by the bank. They are being paid to service the loan, so orchestrating short sales or short payoffs are difficult at best. They are paid to handle foreclosure proceedings, so they are quick to move in that direction. And they are paid to manage properties in REO, so if the properties don’t sell at auction (and 85% or more do not), they get paid to manage the property. Once a special servicer is assigned the banks typically allow them to make the decisions.
A specific example is a CMBS customer we are trying to help. He has an existing $4+ million mortgage with no personal guarantee. He hired us to handle a stipulated foreclosure because he doesn’t feel the property can succeed. In the eleventh hour, he had an offer from an investor to purchase the property of $500,000 over the appraised value. This is unheard of. At auction, the bank will be lucky to net 50% of the appraised (regardless of what the servicer projects). The bids are generally too low, so the property ends up in REO. With too many REO properties, the property is sold at a huge discount (supply/demand). The banks and servicers would have you believe that they will get over 80% out of the property. But we are seeing prices as low as 30% of appraised. The FDIC does not publish the final auction price statistics for obvious reasons.
We have other specific examples of how the government and banks have created this “rush” to foreclosure. One other case involves a loan (non CMBS) that was originated by Washington Mutual. In Jan. 2009, those loans were taken over by J.P. Morgan Chase Bank. The FDIC guaranteed 80% of the balance (for 3 years we believe). What this means is that if a property goes into foreclosure and sells for 20% of its original balance, the FDIC will make up 60%. That means the bank has no reason to accept an offer of short sale or short payoff less than 80% of the existing balance. In most cases, this will exceed the appraised value. The case we are discussing has a balance of $2.25 million. 80% is $1.8 million and the bank will not accept a penny less. We have a BPO of $1.3 million. Which means the customer could borrow about $975,000. This will be going to foreclosure. The FDIC will ultimately pick up the tab, which means we are paying for it.
In the above scenarios, the banks stand to reap the rewards of performing loans, fees, etc., but have mitigated their risk through the assistance of our government and its regulatory bodies. And we wonder why we have a massive foreclosure issue.
It would be in the best interest of the majority to avoid foreclosure whenever possible. Our government has almost insured that this can’t happen.
