New York City Tri-State Area: Era of the Loan Extension
- Jun 30, 2009
With a paucity of new capital coming into the system and many loans maturing, most property owners have limited options. In some cases the value of the property has fallen below or near the loan balance. Most lenders appear to be opting to extend with modest pay downs. This explains why fewer borrowers are refinancing. The option with the least friction for borrowers is to ask for a loan extension. These extensions differ from securitized loans and non-securitized loans.
Borrowers who have securitized loans maturing must deal with special servicers. When the loan is likely to go into default or in default, the securitized loan moves from the master servicer to the special servicer. In most cases, special servicers are determining whether the extension will create a higher NPV than foreclosure. Most extensions are for one year and could involve a loan pay down, increase in interest rate or increased reserves. Commercial banks are dealing with extension quite differently. Unlike the special servicer, the banks are not entirely motivated by an NPV analysis. The banks will consider the same evaluation but also consider the borrower’s relationship with the bank. Most bank extensions can involve a pay down in exchange but the extension period is often greater than a year.
Loan extensions are solving the borrower’s short-term need to avoid foreclosure, but they are also causing the lender to defer the problem, hoping for improved market conditions down the road. And this is the big question – what will leasing, the debt and equity markets, cap rates and the cost of debt be down the road.
If loans are not extended and properties foreclosed or handed back to the lender, the rapid drop in property values could lead to greater short-term stress on the financial institution and ultimately nearby property owners. Neither the extension nor foreclosure option is ideal, but for the time being loan extensions are solving the borrowers and lenders short-term needs.