Banks, CMBS and Life Companies – Different Regulators = Different Approaches When Addressing Work-outs

It seems like we enjoy clichés each cycle to try and generalize the norm. For example, if “extend and pretend” applies to banks and “amend to the end” applies to CMBS then “unwilling to bend” may be the next catch phrase to describe life companies when it comes to work-outs and maturity extensions.

Why the lack of flexibility? The lack of flexibility on behalf of some life companies could rest with their MEAF.

MEAF – Mortgage Experience Adjustment Factor
The purpose of MEAF is to help calculate the appropriate amount of capital an insurer should hold (think cash reserves) based on the composition of the insurer’s commercial mortgage portfolio (think portfolio performance).

How MEAF may influence a life company at extension time or at loan modification request: I’ve spoken to some my life company contacts about MEAF. They report that when it comes to MEAF their portfolios are measured against their peers (all other life companies) and even one or two defaults can have a negative impact on their standing against their peers resulting in an increase in their reserves. So consider the state of the commercial mortgage market. CMBS and banks are experiencing massive defaults but insurance companies, who as a whole were markedly less aggressive during the credit boom, have experienced far fewer defaults. However, since their mortgage experience (the insurance companies) is measured against their peers alone, a couple of work-outs/defaults can cause them to have to increase their Risk Based Capital significantly.

One insurer tells me they would rather foreclose and sell the asset versus restructuring it and have it negatively affect their MEAF until the loan pays off in a few years. With foreclosure they get rid of the loan, sell the property and the problem is solved. I’ve witnessed this firsthand with a number of borrowers whose loans matured in the past 12 months. One particular life company asked for a cash infusion and personal guaranty. When the borrower was unable to provide the necessary capital infusion the life company requested that a receiver be put in place and began foreclosure proceedings.

In another instance, a borrower had a Class-A multifamily loan maturing. The borrower was unable to secure a new loan to take out the life company and was reluctant to sell in the soft market. The life company sighted MEAF as a motivating factor to foreclose and resell the property versus modifying it and living with a negative mark against their portfolio performance during the duration the loan continued to be on their books. They made it clear that it affects their entire portfolio rating to have a problem loan. Once they rework the loan it hangs over them until it eventually pays off. Understand that a below normal MEAF can lead to increased reserves against an insurance company’s entire mortgage portfolio. Considering this, one can see the reluctance on behalf of the insurers to offer any extensions or modifications without right sizing the loan.

James DuMars

Managing Director

NorthMarq Capital Phoenix Office

(602) 508-2206 Direct

(602) 714-4202 Cell