Many Americans would likely say that the not-so-recent recession is well over and should be replaced with the word Republican. Actually, the two may go hand-in-hand. This is not a political statement, but one of continued uncertainty in the market.
In the last 10 years, depending on where you live, you are either still feeling a recession or a continuation of a cautiously optimistic United States economy. Why? Well, let’s look at a few factors in the commercial mortgage-backed securities (CMBS) market.
Many are currently in the process of a refinance or needing to refinance out their 2007 vintage CMBS loans. That seems like a business-as-usual task; however, interest rates have risen and are likely to increase further this year. As a result, the loans that were made at the height of the market (prior to the recession) are being stretched with new underwriting standards as well as the same, or possibly higher, rates. In addition, with regulatory retention laws taking affect in December 2016, borrowers of CMBS debt will likely absorb some of the related costs. All of these factors, as well as the volume of refinances lenders are managing, can cause additional time constraints in closing your new loan.
The lesson you don’t want to learn too late is that it is never too early to start securing a new loan. Typically, six to nine months is a good length of time to hire your mortgage broker and start canvasing the market for the best deal.
If you have difficulties in refinancing, asking for an extension can be a costly alternative for your matured or maturing loan. Typically, your loan will move into special servicing on or after the maturity date. Default interest and late fees can accrue as well as third-party costs like legal, appraisal and environmental. Your promise to pay in a short period of time does not mean that the lender will not pursue its rights and remedies under the loan documents. The best practice is to either contact your master servicer early or find a CMBS borrower advocate to help you through the process.
The regulatory environment with the new U.S. administration taking over could have a positive impact on regulation that constricts both bank and CMBS lending. Dodd Frank, a group of federal regulations primarily affecting financial institutions and their customers, was passed in 2010 in an attempt to prevent the recurrence of events that caused the 2008 financial crisis. Further, in December 2016, as part of the overall federal regulations approved in 2014, the CMBS risk-retention rules require that at least one sponsor of a securitization (or its majority-owned affiliate) retain a 5 percent interest in the credit risk of the securitized assets. With a goal of President Donald Trump’s transition team to “dismantle” Dodd Frank in order to replace it with rules that promote jobs and growth, there will likely be changes on the horizon.
The individual most impacted in all of this, is the commercial real estate borrower. It is incumbent that each property owner closely monitor the debt markets for signs of basic supply and demand, and most importantly, plan ahead!
Tanya Hart Little is a CREW Dallas member and the founder of Hart Advisors Group, a commercial real estate consulting firm serving as a CMBS Borrower advocate in the U.S.