Lenders and CMBS special servicers are still scrambling to work through the growing backlog of forbearance and relief requests. Borrowers looking for clues on just how far lenders are willing to bend—and what comes after initial relief expires—are finding that there is no cookie cutter approach.
Across the board, debt providers are dealing with relief requests with data showing clear hot spots in hotel and retail CMBS loans. “What we are hearing is that servicers are working with borrowers amidst an initial tsunami of requests for various forms of relief and a continued steady stream of requests as the pandemic continues,” says Lisa Pendergast, executive director of the CRE Finance Council (CREFC). CREFC has been in constant contact with its servicing community and also published a Guide to the CMBS Marketplace and CMBS Loan COVID-19 Relief, which provides advice to CMBS borrowers.
According to Fitch Ratings, more than 5,000 CMBS borrowers representing in excess of $100 billion in CMBS loans had reached out to servicers with relief requests as of mid-April. Subsequently, $20 billion in CMBS loans were transferred to special servicers in March, April and May—more than double the volume of specially serviced loans at the end of 2019. Hotels and retail combined represent about 80 percent of the CMBS volume that has moved to special servicing. In addition, Fitch Ratings expects CMBS delinquencies to rise materially higher in July with a significant number of additional transfers to special servicers as loans pass the 60-day delinquent mark. As of May 30, Fitch Ratings was tracking 142 loans valued at a combined $8.2 billion that were between 30 days and 59 days delinquent.
The initial discussion on relief for borrowers started with forbearance. For example, the Federal Housing Finance Agency was quick to issue a forbearance announcement in March stating that Fannie Mae and Freddie Mac would offer multifamily property owners 90 days of mortgage forbearance with the condition that they suspend all evictions for renters unable to pay rent due to the impact of coronavirus. On Monday, the FHFA announced that it would further extend forbearance agreements for up to three more months.
Forbearance refers specifically to reduced or deferred monthly debt service payments. The deferred payments are made up at some point, either added to the back-end of a loan or amortized out over the term of the loan. The FHFA’s fairly blanket commitment to forbearance has been the exception rather than the norm. Forbearance requests range from three months up to one year, while at the same time lenders and CMBS special servicers are looking for other levers to pull to give borrowers some immediate relief and room to maneuver amid the ongoing pandemic.
“Keep in mind that forbearance is a short-term remedy, and given what we are seeing in the country today regarding the increase in cases, it’s likely that borrowers will need to seek more permanent adjustments to their loans in order to remain current,” says Pendergast. Those longer-term loan modifications are far more effective given the uncertainty that exists today, and servicers do have a vast number of options for loan modifications that can help borrowers gain their footings and focus on returning their properties to working status as soon as possible, she adds.
No one-size fits all approach
Lenders and CMBS special servicers are generally looking at forbearance and relief requests on a case-by-case basis based on the unique circumstances of the property and the borrower, as well as working to make sure the need is really there, notes Jonathan Hakakha, principal at Quantum Capital, a boutique real estate capital advisory firm. For example, if someone took $5 million in equity out of a property in a recent refi, and now they are short $200,000 a month for the loan payment, most lenders are not going to be too eager to provide forbearance, he says.
“Each individual property has its own story, which is why it is difficult to have a broad programmatic relief that addresses all property types,” adds Adam Fox, senior director, structured finance at Fitch Ratings. For example, the first step special servicers have been taking for hotels has been to find some payment relief using FF&E reserves to pay debt service. Those reserve accounts are basically a bucket of money set aside for capital expenditures or upgrades. Some of those reserves can be quite substantial depending on the hotel and the franchise requirements. In many cases, those reserves have been adequate to fund about 90 days of debt service payments, he says.
Another lever lenders can pull is to remove the LIBOR floor associated with the loan rate, which would help to reduce the overall payment amount. Some bridge lenders also have been allowing borrowers to extend their loan past maturity, which saves the borrower from having to refi a loan during the current pandemic.
“What is noteworthy is that we are entering what I would say is forbearance 2.0 in the hotel market,” says Steve Michels, managing director, capital markets at Cushman & Wakefield. Generally, most of the forbearance agreements given in the first few months of the pandemic were 90 to120 days, which means that forbearance is now expiring. “What we are getting to now in the world of forbearance is what to do next,” he says. Do lenders extend forbearance, do they find some other solutions, or do these loans start to move down the path towards foreclosure?
More tough decisions ahead
Going forward, lenders are looking for some type of comfort level from borrowers that they are going to be standing behind their collateral in order to provide additional forbearance relief. “What we have heard from lenders is that they are attempting to work with equity to provide some credit enhancements around these loans, whether that is in the form of interest reserves, a partial loan paydown or some other structure that gives the lender confidence that these equity owners are standing behind these loans in order to extend that forbearance another 90 to 120 days or longer,” says Michels.
As lenders continue to work through forbearance 2.0, they are likely to focus more on separating the winners from the losers and find out which borrowers are willing to protect their positions, and which are not, adds Michels. “I think what will happen as part of this next round of forbearance is that a number of owners may decide they don’t want to put good money after bad and begin a workout process with the lender,” he says.
Borrowers who have a loan with a local and regional bank portfolio lender are having better luck negotiating relief, especially when they can leverage an existing relationship. In a June 23rd Trepp Podcast, Brian Stoffers, MBA chairman and global president, debt & structured finance at CBRE, noted that banks are basically getting free money from the Fed right now and the Fed is suggesting they in turn be accommodative to borrowers.
Those sponsors who have traditionally had a tough time getting a servicer on the phone after their loan is sold into a CMBS pool now face a near impossible task in the current climate where special servicers have been inundated with a spike in the volume of loans that have moved from the master servicer to special servicer queue. “Just the speaking to the right people who have the authority or knowledge to understand the transaction is very difficult,” says Hakakha.
Borrowers also are going to have to make some tough decisions on whether it is worth it to put more money in or start the process to give the keys back to the lender. “We haven’t seen many cases where borrowers are willing to throw up their hands. That may come, particularly in the hospitality industry, but it hasn’t happened yet,” says Fox. Servicers are very much taking a “triage approach” to work with borrowers to discuss the level of relief needed, request documentation, reduce fees and provide relief where it is warranted, he adds.