by John Richard, Managing Director, Investcap Advisors LLC
Borrowers may feel the day of reckoning has been delayed, but this is likely less of a positive for which CMBS market participants are giving it credit. Servicers are not going to be sitting idle with problems over the next twelve months given the maturing loan pipeline and increasing delinquency rate. This argues strongly against taking any decisive action today on a currently performing mortgage that is not due to mature until 2012. There is also the issue of how certain bond investors will feel given pre-emptive modifications. Actions taken ahead of perceived and expected problems will certainly have a dramatic impact on cash flows into a CMBS pool. Not everyone benefits in this scenario. Apart from the issues with bond investors and an increased workload at the servicer level, the prevailing wisdom acknowledges that the underwriting excesses of the past need to work their way out of the system. Modifications in many instances simply mute the symptoms but do not cure the illness.
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I agree with your assessment but I am not sure of the level of impact this reduced cash flow has on the CMBS. It is my understanding that the commercial market roughly precedes the track taken by the residential market and based on a recent study of 60% of our residential mortgage market by a trio of Federal Reserve Economists. They found that only 3% of the seriously delinquent borrowers got a mortgage modification that reduced their monthly payments in the year after they got in trouble and less than 8% got any modification at all.
ReplyDeleteIt is worth mentioning that this same study also noted that renegotiations often fail with the borrowers delinquent again within six months and that in at least 1/3rd of the seriously delinquent cases the borrowers “self-cured” by either catching up with the payments or paying off the mortgage. Now granted, I am referencing residential data but I think parallels can be drawn.