IRS Relaxes Rules for Modification of Commercial Mortgages

Effective Sept. 16th, 2009 the IRS has issued a new rule (IRS Revenue Procedure 2009-45 http://www.irs.gov/pub/irs-drop/rp-09-45.pdf) that eases the restrictions on modifications of commercial mortgages that have been packaged into commercial mortgage backed securities.This action allows borrowers to open discussions with the loan servicer prior to any default in an attempt to work out the loan. Prior to this new rule only a very small number or loans in a servicing pool could be modified and they must already have been in arrears.

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Commercial property defaults may set record - study

By Ilaina Jonas

NEW YORK, Sept 8 (Reuters) - Commercial mortgage defaults of loans made by banks are projected to peak in 2011, and could set a new record next year, according to a report released on Tuesday by Real Estate Econometrics.

The real estate research firm revised its early projections for the rest of the year, viewing the default rate of mortgage loans on office buildings, hotels, shopping centers hotels and other non-residential income earnings property to be 4.2 percent, up the most recent forecast of 4.1 percent.

Falling rental rates, higher vacancies and the absence of a functioning credit market have combined to undermine borrowers' abilities to keep current with their monthly payments.

Real Estate Econometrics also raised its default projections for next year and 2011 to reflect a larger number of loans moving from delinquency to nonaccrual -- loans lending institutions do not expect to be repaid in full.

In the second quarter, delinquent commercial mortgage balances across all banks fell by about $2 billion, while those in nonaccrual balances jumped $6.5 billion.

The shift corresponds with banks working to identify and mitigate losses associated with problem loans earlier in the delinquency period and a rise in the share of delinquent loans that will require modification or foreclosure, Real Estate Econometrics said.

At 2.88 percent, commercial mortgage defaults in the second quarter were at their highest level since 1993/1994, the report said.

The most aggressively underwritten commercial mortgages begin to mature in 2011 -- just as property fundamentals and prices are stabilizing, Real Estate Econometrics said.

Higher expected defaults are expected to be especially troubling for smaller banks because their exposure to commercial real estate is significantly higher.

For institutions with more than $10 billion in assets, commercial real estate concentrations are 9.5 percent of net loans, while those with less than $10 billion in assets, concentrations surpass 20 percent, the study said.

At 28.4 percent, exposure to commercial real estate is highest for institutions with $100 million to $1 billion in assets, Real Estate Econometrics said. (Reporting by Ilaina Jonas; Editing by Anshuman Daga)

Commercial Real Estate’s $1 Trillion Time Bomb

Yesterday I wrote about a looming crisis in the commercial-mortgage-backed securities market. But there’s another time bomb ticking away in the commercial sector: U.S. banks are holding more than $1 trillion of mortgages backed by commercial property that is fast losing value.

According to analysts at Deutsche Bank AG, as property value declines and scarce credit continue to drive commercial property developers and investors into default, total lifetime losses on banks’ $1 trillion “core” commercial-mortgage holdings, or those backed by income-producing properties, would reach between 11.6% and 15.3%, or $115 billion and $150 billion. Those expected losses would be at least as large as those on loans originated and bundled into commercial-mortgage-backed securities, or CMBS, from 2005 and 2008, a period of cheap and reckless credit, the analysts estimate.

Indeed, problem real-estate loans are like a morning-after headache for the nation’s banks. During the boom times, bankers flocked to commercial real-estate lending, making such debt one of the largest lending categories, which also include home mortgages. Then, about three years ago, the real-estate slump started with the housing market, and gradually spread to construction loans to homebuilders and tied to residential projects. Commercial mortgages are the latest to take hits.

In contrast to home loans – the majority of which were made by only 10 or so giant institutions – thousands of small and regional banks loaded up on commercial property debt. As a result, commercial real estate troubles would be even more widespread among the financial system than the housing woes. At the present, more than 3,000 banks and savings institutions have more than 300% of their risk-based capital in commercial real-estate loans.

So far, banks in general have been reluctant to take losses on their commercial books. This “delay and pray” strategy is preventing most banks from issuing new loans as they prepare their balance sheets for potential future losses, experts say. “Banks will eventually sell as they cannot extend into perpetuity and the chances that the market will rebound to their highs are unlikely anytime soon,” said Bart Steinfeld, managing director of Jones Lang LaSalle’s Real Estate Investment Banking practice. “We expect the smaller, community banks to begin selling their small balance loans first.”

For many of them, what is at stake is survival. And even many banks that survive the current real-estate slump will be seriously weakened; funds that they set aside for potential loan losses must be subtracted from earnings or capital even before any losses are incurred.