SAN DIEGO — Loan servicing is fast becoming a hot topic among commercial real estate borrowers and lenders as the U.S. economy and real estate fundamentals spiral downward. Interest is so strong in fact that the Mortgage Bankers Association has scheduled three panel discussions on the subject as part of its 20th annual Commercial Real Estate Finance/Multifamily Housing Convention & Expo. The convention opened Sunday and continues through this Wednesday at the Manchester Grand Hyatt.
“That’s unheard of,” says Jan Sternin, senior vice president of the MBA’s commercial/multifamily division, referring to the conference’s heavy emphasis on loan servicing. In particular, commercial mortgage-backed securities () are under the microscope. “The borrowers are coming to the mortgage bankers and saying, ‘OK, I’m having some problems with the fundamentals of my loan. How do I work with my servicer?’"
The U.S. economy shed 598,000 jobs in January alone, according to preliminary estimates from the Labor Department. Massive employment losses over the past year have led to rising vacancies across the property types and dealt a blow to owners’ net operating income.
Historically, not until a borrower defaulted on a CMBS loan would the special servicer intervene to work out a loan modification or liquidate the loan. But increasingly special servicers are playing a role early in the process, according to Sternin.
“Now special servicers also consult with the master and primary servicers on a lot of the regular decision-making items related to borrower requests, whereas they would not have done that a number of years ago,” says Sternin. “It’s much more interactive between the master and special servicer.”
For their part, the master and primary servicers collect payments from borrowers, hold and make disbursements from escrow accounts for tax and insurance purposes, and perform certain loan administration functions. The master servicer also manages the flow of payments.
The problem is that despite increased interaction among servicers, the role of the special servicer is limited by IRS rules pertaining to real estate mortgage investment conduits (REMICs), explains Sternin.
“REMIC doesn’t allow for any major modification of a loan when it is not in default,” says Sternin. “We [MBA] are heavily advocating REMIC reform, which would allow us a certain amount of flexibility.” MBA has pursued REMIC reform for three years, she adds.
Ultimately, Sternin believes that restoring the health of the commercial real estate market will require a multi-pronged strategy on the legislative and regulatory front and at the property level.
“This is unprecedented,” she says of the credit crunch and economic meltdown. “The great economists and researchers that we read, and our economists here at the MBA, all agree that this is unlike any cycle we have ever seen. That’s because it is occurring on so many fronts.”
The troubles confronting the CMBS market and the broader economy are reflected in this year’s preliminary attendance figures. As of Tuesday, Feb. 3, some 2,000 persons had registered for this year’s MBA convention compared with 3,900 attendees at last year’s show in Orlando, a 48% drop barring any last-minute registrants. In 2007, at the height of the mortgage market, slightly more than 4,800 industry professionals descended on San Diego for the annual convention.
This year’s convention marks a 20-year milestone for the MBA. What began as the Income Property Finance Conference in Orlando in 1989, drawing roughly 300 attendees, has evolved into a major educational, networking and forecasting event.
“In times like this, where information and relationships are really key, when a good number of our friends are not affiliated with the same employer they that were a year ago, we provide a platform for our member groups to network and to share knowledge,” explains Sternin. “Even with a limited number of folks coming, we are definitely bringing the stellar voices of industry.”
Bill Hughes, senior vice president and managing director of Marcus & Milichap Capital Corp., who is participating in a conference panel discussion on Tuesday afternoon titled “Valuations, Trends and the Underlying Underwriting Model,” takes today’s crisis in stride. That’s largely because he’s had more than 30 years experience in the business.
“Experience has taught me to be patient with the marketplace, never to think it’s going to get too bad, never to think it’s going to turn around right away. It will turn around. I have confidence that the market will stabilize,” says Hughes.
Hughes didn’t always exude such optimism. “In the past, particularly in the late 1980s and early 1990s during the period of the RTC [Resolution Trust Corp.], I was contemplating starting in a new industry, quite frankly. I wasn’t sure that it was ever going to come back around. Today, I have great confidence that we’ll figure this thing out. Investors are very resilient. I think commercial real estate values are quite resilient, although certainly they’ve taken quite a hit today. I think they will rebound. It’s just a matter of time,” says Hughes.
Hughes’ panel will examine lenders’ underwriting standards today and identify the most active lenders in the industry. It’s a challenging environment for capital providers on a number of fronts, he insists.
“Lenders are having towith rent rolls that from year to year that aren’t looking as good,” Hughes explains. “They’re dealing with vacancies from year to year that have gone up. They’re dealing with expenses that have gone up some. We’re seeing incomes diluted to a certain extent. That’s not particularly a favorable market for a lender to underwrite a deal in.”