Hanasab & Zolekhian, LLP - Blog » Banking

Local Banks and Commercial Loans

Raymond Zolekhian — Fri, 06 Nov 2009 22:26:01 +0000

It seems that commercial real estate mortgages held on the books of local banks are finally getting the attention they deserve. After several months of both media and government attention on commercial mortgage backed securities, both the FDIC and the media are finally focusing on local banks as well. In an article in Business Week, they focused on the tremendous amount of commercial mortgages held by local banks and the dangers that this poses. It appears that the FDIC guidelines that were recently released were intended to address this issue; however, it seems that the banks have been very slow to familiarize themselves with the document. Many banks that I have spoken to this week were either unaware of these new guidelines or had yet to review them.

I would hope that once the banks have time to review and implement these guidelines, the process for obtaining a commercial loan modification will be more efficient and streamlined. It appears that this was the intent of the FDIC and will be to the benefit of both banks and borrowers. At the end of the day there will undoubtedly be many loans that are beyond repair and foreclosures on commercial properties will be inevitable, but these guidelines should be able to slow down the bleeding.

Capmark Files for Bankruptcy

Raymond Zolekhian — Wed, 28 Oct 2009 00:30:43 +0000

Bloomberg reported that Capmark Financial Group, one of the largest U.S. commercial real estate finance companies has filed for Chapter 11 bankruptcy. Capmark was feeling pressure on two fronts. First and foremost, they had originated more than $10 billion worth of commercial real estate debt. As the default rates on these loans began to increase, the pressure on the company mounted. The company took a second blow when an increasing number of loans that were being serviced by Capmark for other lenders began to go into default. Generally, the extent of Capmark’s servicing duties included sending out statements and collecting checks. This is typically the duty of a master servicer under a CMBS loan.

Once a CMBS loan goes into default, it is generally moved to what is a called a special servicer. Often times, this is simply another division of the master servicer. The special servicer has the authority to make modifications to the original loan in order to maximize the return to the investor. This gives the special servicer a broad range of duties and powers, but is also very labor intensive. The influx of defaults and the subsequent strain on its special servicing unit was a critical factor leading to Capmark’s bankruptcy.

FDIC Failed to Enforce Guidelines

Raymond Zolekhian — Tue, 20 Oct 2009 00:52:45 +0000

In another Bloomberg article today, it was reported that the FDIC basically dropped the ball when it came to enforcing their own guidelines. In 2006, the FDIC set forth guidelines providing that banks should not have commercial real estate holdings that exceeded 300 percent of their capital. I guess it’s pretty fair to say that nobody was really paying attention to those guidelines. Many of the banks that have already failed had commercial real estate holdings that well exceeded the 300 percent threshold and it is almost certain that many of the banks that are currently on the brink of failure are similarly situated.

This is likely one of the major reasons that the FDIC will soon be announcing a set of guidelines for commercial mortgage modifications. You hope that the FDIC will be better at implementing these guidelines than they were at implementing the 2006 guidelines. A comprehensive set of guidelines for the modification of commercial mortgages is likely the only solution for the impending collapse of the real estate markets. Had the banks not been so highly leveraged and had they not so highly leveraged almost all of their loans, the market may not have reached the breaking point that it is currently at. But the banks did not follow the rules and the FDIC did not enforce them, so there is blame to be shared by everyone.

Small Banks Face Pressure

Raymond Zolekhian — Wed, 12 Aug 2009 05:44:24 +0000

An article today by The Associated Press discusses an issue that I have felt for some time now has gone unaddressed by the media and the government. This issue is that of “whole” loans which are also referred to as portfolio loans. These are loans that are held by the lenders, as opposed to commercial mortgage backed securities (CMBS) loans that are packaged together and sold in the secondary market. It seems that all of the government programs that have been implemented or are in the pipeline solely address the issue of CMBS loans. This leaves the issue of whole loans which are held for the most part by smaller, local banks largely unaddressed.

Many of the loans that have come through my office are of the portfolio variety. Most are in default and the others are on the verge. As these loans increasingly begin to default, these smaller banks will come under increasing pressure and many more will begin to fail. Some of these banks have begun to open up to idea of modifying loans in order to cure or prevent defaults, but others are not as eager as a result of accounting rules that complicate the process. Without a change in these accounting rules and/or government programs encouraging commercial loan modifications, a second wave of bank failures will occur and further dry up what is left of the credit markets.