Commercial mortgage modification is not usually talked about in the news because of the current focus on home loans. Thus, the problems of owners of commercial properties, such as hotels, apartment buildings, warehouses and office buildings, are often neglected. However, experts predict that there is an upcoming wave of defaults on commercial mortgage loans that could be worse than what was seen in the residential sector.
The slow down in the economy and the job losses are causing a decline in consumer spending so that people have reduced their shopping budgets, there are less clients for warehouses, and there are less tenants for office buildings. As companies reduce their costs and people minimize their vacations, hotels are also experiencing record high vacancy rates. The result is a negative cash flow for many businesses that makes it very difficult for the owners to come up with the mortgage payments.
Another reason why commercial mortgages are rarely mentioned is that banks and other lenders are keeping silent about the trillions of dollars in commercial property loans that they are holding and will be due in 2010 because they do not want the commercial mortgage-backed securities (CMBS) holders and taxpayers to worry. They are also waiting for instructions and possible funding from the federal government so that they can provide modifications that are guaranteed by Freddie Mac or Fannie Mae in case of a default after the commercial mortgage modification.
However, experts are suggesting that lenders and borrowers should not wait any longer before working on their plans for commercial mortgage modifications to ensure that the impending problems will be resolved before they become due. It is believed that the only acceptable solution to the problem of protecting the holders of CMBS loans and the lenders who provided the remaining 80 percent is through modifications. This will provide more time for the collection of payments and the property owner will also have more time to look for new financing. Usually, the term of the loan is extended with the possibility of paying only the interests for a certain period.
The apprehension about the commercial mortgage modification of a CMBS loan is the result of current legal impediments. However, the loans that are in default may be eligible for transfer from the master servicer to a special servicer. The latter has the power to modify the commercial mortgage if this is the best option for the shareholders.
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