Knowing what you know about banks and CMBS services what challenges are they having?
Andy Broadaway here, and I’m with Richard Hollowell addressing a host of questions real estate owners are now asking themselves due to the adverse effects of the Covid stay-at-home order. Richard, knowing what you know about Banks and CMBS Special Servicers, what challenges are they currently having?
Great question Andy. Many real estate borrowers who finance their properties with Banks or CMBS Lenders don’t really understand what’s going on inside their bank or loan servicer when a multitude of their borrowers stop making payments at once. As loan defaults were near all-time lows before Covid hit, lenders were totally unprepared for the surge of loan forbearance requests. So, the popular saying that “we’re all in this together,” is quite true. The CMBS special servicers and the special assets departments of banks, are in this up to their eyeballs right now with calls from their borrowers. Let me give you an example; I was talking to the Southern California special assets representative for a top 25 bank around May 1, 2020, he has to address all the non-paying real estate loans in the Southern California area. Literally, he’s on the phone with borrowers, he hands out receiverships in cases where he’s foreclosing, he works on modifications, and he works on forbearance requests. So, until he finds more help, he’s a one-man-band who could work 30 hours per day.
I’ve been through six real estates downcycles and never before did I see lenders with literally few non-performing loans, then overnight a literal flood occurs. And staffing-up with bankers who have skill sets in dealing with troubled loans will be tough, as many of the experts that worked on troubled loans during the Savings & Loan crisis of 1988 to 1995 are no longer in the workout business, or retired. So, if you’re calling your bank to ask for forbearance and you’re having trouble getting through, now you know why. As for CMBS Special Servicers, they’re in the same boat as banks. I’ve talked to some of my contacts in the Special Servicing business and the tell me that every asset manager is getting 10 new troubled loans to work on every day. So how does an asset manager deal with that volume until they hire more people? As someone who was the national President of a Special Servicing company that employed 175 full time people, I can tell you that it take a few days to do a preliminary triage of each file, let alone getting together with your borrower, his consultants, and possibly his lawyer to come up with a forbearance or loan modification package. Remember, if you have a loan that’s been placed with a Special Servicer on Monday morning, he’s going to have another 40-50 new loans to work on by the end of the week. Both banks and special servicers are frantically trying to staff up now.
So I tell the borrowers, you must be proactive in developing a strategy and put it in front of your lender as soon as possible. That strategy should be well thought out, well documented, and put in a clear format that tells the lender the full story, including what you’re requesting. The more complete your strategy is, the better chance you have of getting into loan committee earlier for approval.
So, do as much of the lenders work as you can to bring him up to speed, don’t make him start from scratch when you make your request. Make sure your presentation summarizes (i) why the loan was made, (ii) what the original underwriting looked like, (iii) what your trailing-12 month cash flow looked like, (iv) why are you asking for forbearance, (v) what is your strategy to get your payments back on track, (vi) whether you are willing to commit additional money to fund cash flow deficits, and (vii) why the lender should leave you in charge of the property as opposed to putting it in the hands of a court-appointed receiver. Those are just some of the issues we address when we help borrowers come up with loan modification strategies.
What I’m hearing you say here is that there is an incredible lack of skilled professionals to deal with troubled loans. And that if I’m a borrower who needs to go to his lender, I better have a well- documented plan. And I know that’s a sweet spot for your firm, helping real estate owners come up with well-documented workout strategies that effectively document the request just like the lender would, correct?
That’s correct. We help prepare “committee ready” presentations that will garner a quick reaction from your lender. You don’t want your loan sitting on the bottom of a pile while you’re unable to generate the cash flow to make your full payment. Remember, once the lender receives our request, he’ll go through a quality control process to see if he agrees with our strategy, then he reacts, so you want to get started on this process at the earliest possible date.
Well, for me, I’d rather be at the front of the line than the back of the line all day long. So, I mean, working with your company and having you help put together and document a strategy is a great idea. So, Richard, how do we get more information from your company? What’s the process look like? What’s are some of the initial steps.
For a property owner that has a challenge, there’s actually a form on our website a person can populate which asks that explain your conflict to us. Then we will set up a consultation to see if that’s something that we might help with. One thing we’ll promise is that we’ll assess your situation, we’ll tell you how the lender will react to your problem, then help develop a plan that we believe will work. Often, borrowers don’t like what we’re telling them, but we will always be honest as we’ve sat in the lender’s chair over the years. And by way of disclosure, we are not always successful. But, we start with having the lenders playbook and we will always do our best to come up with a solution that works for all parties. So real estate owners can review our qualifications and those of our team members at RichardHollowell.com.