If you have a distressed loan, and your lender is still talking to you, there’s probably a simple reason why—your lender doesn’t want that loan. But as panelists at last week's ULI Fall Meeting pointed out, the attitude of the lender could largely be traced back to what sector of the commercial lending spectrum they were in, as well as how much oversight they faced.
For instance, MetLife would rather not take over a loan, foreclosing on only two properties in its $365 billion portfolio, according to Mark H. Wilsmann, a managing director at the insurer. “Foreclosure is usually considered the last resort when the borrower isn’t able to bring fresh capital to the table and isn’t able to demonstrate a commitment to the asset,” he says.
That said, Wilsmann reiterated that MetLife would foreclose if necessary. “Your recovery rate on a restructure is higher than your recovery rate on foreclosure,” he said. “But we’re not afraid to foreclose.”
Part of the reason for MetLife’s flexibility is oversight. Wilsmann pointed out that insurers were regulated by state insurance commissioners, which may not have the same level of focus as the federal agencies. “They generally don’t micromanage the loan portfolio,” he said.
Part of the federal oversight is heavily dependent on what kind of financial situation the lender is in, though. “If you pay TARP, and your capital is in a sound position, you don’t have much regulatory oversight,” said Wayne Brandt, managing director of real estate capital markets for Wells Fargo. “We’re making return on investment decision asset by asset and not based on what the regulators have told us.”
In the CMBS servicing arena, the situation is different. Loan documents control what the master servicer can and cannot do. The special servicer has more latitude, but the loan has to go into default before it gets to them for restructuring. Some borrowers are actually not paying and putting their loans into strategic default instead.
“It’s never comfortable for a lawyer to have his client go into default,” said Philip D. Weller, a partner for law firm DLA Piper.
Stacey M. Berger, executive vice president of Midland Loan Services, says he recommends that borrowers don’t go into default, but acknowledges that sometimes it’s necessary. If they do take the strategic default route to prompt negotiations, he has advice: “If you stop paying, you should make sure to tell the servicer that you’re escrowing your money,” he says.
Wilsmann says MetLife is very open to modification talks but hasn’t done one where the borrower didn’t bring money to the table. “What works for us is openness and honesty and throwing your cards on the table,” he says. “Tell us what you’re willing to do, and what you can’t do.”
Opening up discussions with their servicers can ultimately help borrowers secure their properties. For instance, Berger says that after testing an asset’s market value, Midland has had success with discounted payoffs (DPOs).
“We have found that DPOs, in our shop, have been a very effective tool to resolve assets quickly,” Berger said. “When you evaluate the cost and time alternatives, DPOs are very attractive if you can get the right value.”
But showing just how drastically attitudes differ by lender, Wilsmann says some life companies won’t do a DPO. “We would only view that as last resort if you can’t work out modification structure that works,” he says. “To me, a DPO is a subset of selling the loan.”