We've seen lots of issues with Residential Mortgages. Are Commercial Mortages "the next shoe to fall"?

As if the issues we’ve been having with Residential Real Estate (and their underlying mortgages) haven’t been enough, there is quite a lot of talk now about what many people believe to be the next “shoe to fall.”

-- Commercial Mortgages --

To summarize the problem, let’s say that we own a piece of property and, for the past several years, we’ve been paying our note every month, on time, without issue. Let’s also assume that we have plenty of income and are not in jeopardy of not being able to pay the monthly payment.

Now, let’s assume that the loan that we have on our property (again, this applies to both residential and commercial properties) is about to come due (meaning, we need to go back to the bank/lender and get a new loan with new terms).

Under normal circumstances, since we’ve been making our payment on time and we have been a good customer, the bank/lender would work with us to get a new loan.

Fast forward to today’s economic environment… Default rates on loans have increased significantly and, as a result, more and more properties have been placed on the market for sale at whatever price the market will bear. The term for this sale process is often referred to as a “fire sale.”

So, what happens when there is an abundance of property on the market for sale at bargain basement prices? The sale (and appraisal) price of every property falls like a stone… So, what if you are not selling? Why does it matter that the appraised value of your property has gone down?

Well, let’s go back to the person that owns a piece of property, has paid their note on time, and now needs to refinance that note. They go back to their lender expecting to ‘renew’ their loan at current rates only to learn that the lender isn’t really interested.

For example, according to an August 31, 2009 Wall Street Journal article, “281 commercial loans valued at $6.3 billion weren't able to refinance when they matured in the past three months, even though 173 such loans worth $5.1 billion were throwing off more than enough cash to service their debt.”

According to the same article, it is estimated that another $153 billion in commercial mortgage backed securities will be maturing by the end of 2012 and, unless something changes, it is anticipated that roughly $100 billion of that will face difficulty getting refinancing. So, unless something changes, commercial mortgages could have trouble ahead…

What Does This Mean For Us?

The first thing to remember is that this is only an issue for those properties that are not prepared to do whatever the banks require when it comes time to refinance their notes. If the bank asks for another 10% down, the property owner needs to be prepared to do so.

That is why we are seeing more and more companies taking steps to ‘stockpile’ cash so that, when the time comes, they are better prepared to work with their lender on the terms of a new loan. As I’ve said before, cash gives you options, so in troubled times, the more cash you have, the more options you have!

What Is Being Done To Help?

One thing that has already been done was the extension of TALF (Term Asset Backed Loan Facility), a Federal Government program that is intended to stimulate lending by allowing private investors to purchase commercial backed mortgage securities with a matching government investment. This program was also recently extended through June 30, 2010. More needs to be done and more will be done…

However, in my opinion, the one thing that could help the most is if the banks would actually start lending money again! For example, if a note comes due and the borrower has made their payments on time, why shouldn’t the bank simply extend that loan, under the same terms, for another year or two (or more)? What does the lender have to lose? If the borrower suddenly stops paying, the lender can foreclose and take over the property. However, if the borrower continues to make their payments, the bank doesn’t have to deal with a “troubled asset” and they get repaid! Win-Win!

Will this happen? To be honest, I am not certain, but I do think that if the banks don’t start lending again, the Federal Government could easily step in and we might not like what they will do on our behalf.

I am watching all of this very closely and, as I’ve said before, we’re recommending that everyone keep higher than average cash balances so that they have the ability to react to whatever happens in these uncertain times.

If you have any questions about this or any other financial issue, give us a call and we’d be happy to help!

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Todd VanDenburg, President of VanDenburg Capital Management, is a well-known financial educator in Santa Rosa, CA. For many years, Mr. VanDenburg has been teaching Sonoma County investors age 60+ how to preserve their assets, increase their income, and reduce income taxes. Thousands of investors have used Todd's advice to wisely invest millions in order to help grow their assets and pay less income tax. Consequently, Mr. VanDenburg is regarded as a local expert in the financial risks and opportunities of retirement. His office is located at 2880 Cleveland Ave, Suite 3 in Santa Rosa, CA 95403.