2009-03-17, 16:24

Upcoming Maturing Mortgage Crisis

By: Multifamily Real Estate Industry Team
There are so many negative things swirling around in light of our current deplorable market conditions, sometimes it is hard for me to settle upon the particular piece of bad news to focus on as I start each day. Today, I am feeling the (now customary) pit in my stomach about the upcoming volumes of mortgage loans secured by multifamily assets that will be maturing in the next 24 months.

The Mortgage Bankers Association recently reported that $171 billion of multifamily and commercial mortgages (i.e., one-tenth of the outstanding balance) that are held by non-bank lenders and investors will mature in 2009. In particular, large volumes of multifamily loans are expected to mature after 2009 and 2010. “There will be about $29 billion coming due in 2009 and $26 billion in 2010. The volumes of maturing multifamily loans will increase as five- and 10-year loans become due in 2011 and 2012, and in 2015 and 2016…” http://www.multihousingnews.com/multihousing/content_display/news/e3i15435a14e5c99a2089a10d3c168dd630

NMHC reports that in the next two years, an estimated $80-$100 billion in multifamily mortgages will mature and need to be refinanced. “With credit markets virtually collapsed, however, owners who are meeting their financial obligations but who—by sheer timing—are in the unlucky position of having their mortgages mature in 2009 and 2010 may be forced into foreclosure.” NMHC believes that the multifamily industry is “facing a serious risk of waves of defaults and bankruptcies of otherwise performing apartment properties unless the Federal Reserve and the Treasury Department take action." http://www.multihousingnews.com/multihousing/content_display/news/e3if08da6d1db7f9cb40bd1e4bf35036baf

How should multifamily owners and investors anticipate and plan for the maturity of their mortgage loans in the absence of any foreseeable capital markets activity enabling them to refinance? Here are a few things to consider:

1. To state the obvious, start by analyzing whether to hold on to, bail out of or attempt to reorganize your community in light of the upcoming maturity of its financing. If a workout approach may make sense, evaluate what is in it for both the borrower and the lender. In today’s market, many lenders have the incentive to work with borrowers because they do not want to take properties back. Assess what is needed from the borrower’s perspective to try to make property work. What type of modifications to the economic terms of the loan would allow the property to get back on track? What upside will flow to the lender to support a work out approach from the lender’s perspective? What does the borrower need (for example retention of management fees) to stay engaged in working through the property’s issues and not just handing the keys back to the lender?

2. Another critical factor to consider is the financial condition of the lender. If the lender is, itself, facing financial difficulties, it may be productive to consider a loan workout approach, even if your project’s circumstances appear particularly bleak. We are seeing a number of circumstances where troubled lenders will agree to extend the maturity date of a loan and otherwise modify the loan’s economic terms (including leaving the loan as interest only rather than amortizing) to avoid the loan going into default. We have also seen circumstances where lenders will agree to a borrowers purchase of both performing and non-performing loans at significant discounts in order to permit the lender to raise desperately needed cash.

3. Carefully review your loan documents before taking any action, in particular any voluntary bankruptcy filing, as a strategy to reorganize your community’s debts. Many of the loan documents that were signed in recent years contain “full” springing recourse provisions triggering material liability under a wide variety of circumstances. Typically, upon a voluntary bankruptcy filing, guarantors of the loan become personally liable for the repayment of the entire outstanding balance of the loan (including interest, fees and collection costs). Please a more detailed analysis of the risk of full springing recourse in loan workout transactions prepared by my colleague, Jeff Tarkenton. http://www.wcsr.com/default.asp?id=114&objId=297

4. Communicate early and often with your lender. In particular and if possible, initiate discussions with the lender before the community is in extremis – while the borrower (or its principals or affiliates) still have some cash to feed back into the deal to achieve negotiating leverage with the lender. However, do not invest additional cash or other resources into the community until the lender is prepared to enter into a comprehensive restructuring agreement that puts the community back on track.

These times are certainly among the most challenging and stressful many real estate professionals have seen in their careers. Those that stay focused on the horizon and directly and proactively manage loans that will be maturing in the near term have a better chance to emerge from the darkness with their multifamily portfolios relatively intact.

(This entry posted by Pamela V. Rothenberg, a member of Womble Carlyle's Real Estate Development group.)

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