Friday, April 16, 2010

April 2010 Market Watch: Maturing Commercial Mortgages

Some recent press has focused on the challenges of maturing commercial real estate mortgages in today’s market. About $1.5 trillion in commercial and multifamily mortgages held by lenders is currently outstanding. With deterioration in underwriting fundamentals, many loans will be difficult to refinance as they mature.

Based on a recent Mortgage Banker’s Association survey, $183.9 billion of the $1.45 trillion of outstanding commercial and multifamily mortgages will mature in 2010. GSEs (Fannie, Freddie, FHA, Ginnie Mae) will see 2% of their outstanding mortgages mature, life insurance companies will see 7% of their outstanding balance come due this year and CMBS will see 12% of their balances mature. It is important for owners and investors to know how their lender will look at loans as they mature.

Since GSEs operate as both portfolio lenders and security issuers, they have considerable discretion in dealing with maturing loans in their portfolio. For loans they have securitized, GSEs are restricted in what they can do and in some cases have to buy back a loan in order to work through maturity-related issues.

Because CMBS mortgages are held in a trust, servicers have limits on how they can deal with maturities. Servicers have some ability in extending or modifying fixed-rate mortgages, and less flexibility for floating-rate mortgages. A servicer’s job is to maximize net recovery on a present value basis. When loans are flagged as troubled, a master servicer will be assigned who generally has more flexibility in providing forbearance, extension or modification.

As portfolio lenders, life insurance companies have considerable flexibility in how they deal with maturing mortgages. Financial institutions and life insurance companies have to take reserve against loans that require extensions or loans that are classified as non-performing.

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