CMBS Loan Default: What Are Your Options?
Jul 11, 2017
If the beginning of this year is any strong indication, the growing number of headlines in the past few years forecasting greater commercial mortgage backed securities (CMBS) loan defaults by the end of 2017 were right. While of course troubling, the defaulting of CMBS loans isn’t something new. What’s different, then?
The need for CMBS financing is outpacing the availability of accessible funds. Some estimates put the total value of maturing commercial mortgage-backed securities at over $200 billion from the last half of 2016 through the end of this one. Unfortunately, issuances by CMBS lenders have also been on a decline in the past couple years. This is reflective of tighter origination standards by banks, which will continue to tighten if the Fed hikes interest rates again this year (a likely decision).
CMBS Delinquencies on the Rise
Unfortunately, some investors with CMBS are already finding themselves in hot water. Their CMBS are coming to maturity, but at a time when newer CMBS origination parameters may not be as likely to provide them with their needed commercial financing.
In fact, the delinquency rate for commercial real estate loans in CMBS during June increased by 28 basis points (bps) from May, which represented a 5.75% jump and $2.4 billion in newly delinquent loans. According to data from Trepp (updated monthly), these delinquency rate increases weren’t isolated to one sector, either. All commercial real estate sectors saw increases, led by the industrial sector, at 7.57%.
Even as $400 million in loans were cured and $1.3 billion in previously-delinquent CMBS loans were resolved in some way, the numbers are still weighing in favor of delinquency; rates are up 52 bps over the first half of the year, and 115 bps from this time last year.
This scary situation may sound familiar to you, but don’t worry – you have options.
What are Commercial Mortgage Backed Securities?
To better understand the options you have in front of you for your maturing commercial mortgage-backed security, we should first explore the CMBS loan basics. CMBS are a type of mortgage-backed security that is secured by mortgages on commercial properties, rather than residential properties.
The underlying commercial loans include loans for properties like hotels, office buildings, retail spaces, apartment complexes, and more. These loans are bucketed into a range of tranches, tiered from highest to lowest quality. Higher quality tranches receive both principal and interest payments and typically have the lowest risk, while lower tranches take on more risk and are designed to take on more of the potential losses.
By securing these loans, banks can issue more total loans; meanwhile, investors have easier access to commercial real estate. When these CMBS loans mature, they can be refinanced – unfortunately, many commercial real estate investors find themselves unable to refinance as lenders have tightened their lending regulations in the past couple of years.
How can I avoid a default?
The first tip to avoiding a default is to plan ahead. Loans that are not in payment default can be saved from a maturity default and foreclosure. In many cases, searching for and securing financing a few months in advance can be a huge benefit.
Should time or financials present an issue for securing a commercial real estate loan from a traditional lender, an asset-based loan from a private company can provide the bridge you may need to avoid defaulting. This is due to two key differences between private money financing and traditional bank underwriting: Credit requirements and time required for funding.
Banks have strict underwriting standards to help protect themselves from the risk associated with financing. As lenders have tightened their underwriting standards, getting a CMBS loan has become increasingly difficult. Rather than fighting against difficult or prohibitive underwriting standards from banks, one can instead leverage the value of a subject property as the basis for a loan.
The bank underwriting and loan origination process can also provide issues because this timeline often takes a few months. If you’re approaching deadlines on a CMBS loan, an asset-based loan takes far less time, often just a week or two.
The Solution to a CMBS Default
As more and more CMBS loans default in 2017, commercial real estate investors must be diligent in order to avoid falling into this unsavory statistic. If time, credit, or financials are causing the refinancing of your CMBS loan difficulty, an asset-based loan from an alternative source such as Riverdale Funding may help.
This article was originally posted on June 30, 2017 and updated on July 11, 2017.