Are there differences in how banks, CMBS lenders, and private lenders consider a problem loan situation? And, how does each look at my forbearance request?
I’m here with Richard Hollowell and this is a continuing interview. And what we’ve done with this, is we broke the interview process down to specific questions. So, in prior interviews, we discussed covenant defaults, forbearance requests and loan modifications. And today’s particular question is, “Richard, are there differences in how banks, CMBS lenders, and private lenders consider a problem loan situation? And, how does each look at my forbearance request?
Well, that’s a question that I get frequently because 25 years ago, it wasn’t just banks that were making real estate related loans, but lenders who entered the market to make CRE loans, after which they would bundle the loans and sell them off in a security. These are known as CMBS loans, they are generally non-recourse, and they’ve become a big source of money for real estate borrowers. And then of course, you’ve got private money lenders, which sometimes might be called hard money lenders. So I get calls from borrowers telling me, here’s the type of lender I have, how will they react when I approach them for loan forbearance or a loan modification? How will they react to my problem?
For starters banks normally have an internal staff to analyze a problem loan and to try to come up with a workout solution with you. For CMBS loans, your loan is serviced by a so-called master servicer, which basically collects payments. If you fail to make payments for 60 days, your loan is transferred to a “Special Servicer,” a collection agent of sorts that is highly experienced in defaulted loans.
I ran a Special Servicing firm back in the 1990s and was the President of that particular company. So employees in these special servicing companies are experts that only work on troubled loans. They have a rule book that is very specific to your CMBS, just like a bank would have loan collection policies and procedures directing their officers on how to deal with you. Having been a Special Servicer and a banker, I have these so-called rule books and I know exactly how they’ll approach a borrower that is not paying. And I also know what it takes for them to grant loan forbearance or a loan modification. Then you have hard money lenders, and that’s a little more of the Wild West because hard money lenders aren’t regulated like banks or CMBS lenders. So, let’s go through, we’ll go through each type of lender for a second or two. With a bank, I previously talked about befriending your lender as soon as you know you have a problem. You’ll probably be talking to your original loan underwrite, or you might be transferred into a so-called special assets unit.
If you’re approaching your underwriter and he or she is not authorized to deal with you, he or she will help you make a transition to the special assets individual. So, I’ve been a special assets officer at a bank, and I also was the President of an asset management company that helped the RTC and FDIC manage over 1,500 problem loans during the savings and loan crisis. So, we had a playbook as to how to react to different types of requests. On the CMBS side, the industry has consolidated and today there are only 5 or 6 major special servicers and we have relationships with virtually all of them. In May, the CMBS industry issued a guide to managing forbearance and loan modification requests, so that’s their rule book as to how they’ll approach your forbearance request. And, we have those guidelines so we can best help our clients.
If you’re in trouble on a hard money loan, you better work off of the relationship you built when you closed the loan. You’ve got to be transparent upfront and explain what your strategy is to work out of a situation. One element all lenders have in common is that each and every one is going to want you to keep paying on the loan, even if they agree to accrue a portion of the payment. Each will want to control all your net cash flow and they’ll be making sure that you’ll be keeping your real estate taxes and insurance payments current. Each type of lender will also be looking to see what kind of additional investment you can make to support payment deficits. So be prepared to deliver an updated financial statement showing your current liquidity. And the other thing they’re going to ask for is really a comprehensive business plan and analysis of where you’re at, where you’re going, where you think your finances are going to be six months down the road, so they can decide forbearance is possible. Remember, you’re the property owner and you need to confidently put forth a strategy, then execute that strategy. In essence, when you gain forbearance or a loan modification, you’ll be graded against your plan.
It sounds like this is something that your team is not only trained to handle, but you personally have almost 50 years of experience in. So Richard, I’ve been taking notes and essentially you used the word playbook several times. And it seems that you have the playbooks that lenders use, and that you talk their language, is that correct?
Yes Andy, that’s correct. And, we understand the idiosyncrasies of each type of loan, remembering that banks normally require their borrowers to provide personal guarantees. That issue alone sheds a special light on your loan situation and how the lender will try to collect. Having sat in the lenders chair for years upon years, we are well equipped to be an advocate for borrowers.
Well, that’s great to know. So how do we get more information regarding working with you and your team? What’s the first steps that we need to take and then let’s wrap up this interview?
The way to get in touch with us is to go to RichardHollowell.com and put a short story about your situation on the form you’ll find on our landing page. We will take a look at your situation and either I or one of our senior consultants will get back to you. Again, just go to Richardhollowell.com