A guide to maturing CMBS loans: when maturing loans in commercial mortgage-backed securities start to encounter financing difficulties, a solution may not be readily apparent. But mortgage bankers can help their clients find acceptable alternatives.

Author:Berger, Stacey M.
Position::Commercial Servicing
 
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Commercial mortgage bankers and their borrowers are struggling with how to effectively deal with maturing loans in commercial mortgage-backed security (CMBS) transactions. A dearth of financing alternatives is available to refinance properties and pay off maturing loans. CMBS servicing involves multiple parties and bifurcated responsibilities, which are confusing and difficult to navigate. This article will provide guidance to mortgage bankers to help them better assist their clients. Borrowers with maturing loans and their representatives need to understand the process by which CMBS servicers manage this very critical activity. Borrowers need to demonstrate to the servicers their ability to be part of the solution, and they need to have a well-defined plan to ultimately pay off the loan through either refinancing or sale of the property. Mortgage bankers can play an important role in helping borrowers understand and document their refinancing efforts and prepare an appropriate presentation to the servicers for evaluation.

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Where's the money?

Current market conditions are extraordinarily challenging for commercial mortgage bankers and their borrowers seeking long-term, fixed-rate financing to pay off maturing loans or finance new acquisitions. The conduits that sourced loans for CMBS transactions have shut down. Insurance companies and other portfolio lenders have cut back their allocations to commercial mortgages. Commercial banks, which typically provide shorter-term, floating-rate loans, have significantly tightened their credit standards.

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By all accounts, there is very limited availability of commercial mortgage financing.

CMBS provided a significant proportion of permanent financing for commercial real estate over the past decade. Total CMBS debt outstanding grew to $823 billion at year-end 2007. Maturities of five- and 10-year fixed-rate loans, as well as shorter-term floating-rate loans, are increasing. The Mortgage Bankers Association (MBA) reports that projected commercial mortgage maturities will total $218 billion in 2009, $147 billion in 2010 and $123 billion in 2011 (see Figure 1).

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This forward pipeline of maturing loans will be a significant issue for borrowers, mortgage bankers, CMBS servicers and investors.

Commercial real estate borrowers in today's market have limited financing options. Valuation issues compound the problems associated with the lack of attractive financing alternatives. Commercial real estate is a highly leveraged investment, and when financing is unavailable or expensive, values decline.

The bid-ask spread between buyers and sellers is wide, and the sale of distressed properties by troubled institutions and government regulators is putting downward pressure on values. In the current economic environment, the market value of any specific property is very subjective. Appraisals are backward-looking, based on actual sales transactions that occurred in the past. Lenders may have little confidence in the new appraised values that support their underwriting.

Even though credit is tight, financing continues to be available for commercial real estate. Unfortunately, it is not as attractive to borrowers as it has historically been. Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) continue to offer permanent financing for multifamily properties. Commercial banks are being encouraged to lend, although at tighter credit standards, including personal recourse or guarantees. Similarly, life insurance companies and other portfolio lenders are finding opportunities to offer low-leveraged loans to finance strong projects with good sponsorship.

When capital markets and credit conditions stabilize, fresh capital will flow back into commercial real estate finance. For borrowers with maturing CMBS loans, timing may be the most...

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