Q&A: How the Mortgage Industry Is Adapting to the Unknown

Centennial Bank’s David Druey and real estate law specialist Sebastian Jaramillo on how lenders and borrowers can navigate challenges brought on by the COVID-19 crisis.
(Left to right) Sebastian Jaramillo, David Druey. Images courtesy of Wolfe Pincavage and Centennial Bank

As financial markets brace for the effects of the spreading coronavirus outbreak, lenders and borrowers are wracked by several pressing questions: How deeply will this crisis impact the economy? When will recovery begin? How does the current situation compare to the Great Recession?

David Druey, Florida regional president of Centennial Bank, and Sebastian Jaramillo, a real estate law specialist & partner at law firm Wolfe Pincavage, addressed some of these concerns and proposed how lenders and borrowers can navigate current events.


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How well were multifamily lenders prepared for a potential downturn ? 

Druey: As a bank, we are better positioned now than we were in the Great Recession. Unlike in 2008-2009, this crisis wasn’t caused by financial institutions. It was outside of our control and the impact was felt very rapidly across industries. During the Great Recession, we saw overleveraged properties and an aggressive loan to cost. Although there are challenges with cash flow now, we have payment reserves for situations such as this, and we are in good shape in terms of loan to value. I anticipate we will come out of this faster than the Great Recession.

Jaramillo: The multifamily market before the pandemic was strong and stable, so there was no need for concern. Most of the measures lenders had in place were geared to respond to a weak economy, not a pandemic.

Tell us how underwriting standards have changed after 2008.

Druey: I think that financial institutions have maintained underwriting standards,- and it’s more so the mezzanine financing that has loosened its guidelines. Projects often seek this hybrid of debt and equity financing in order to fill the gap after obtaining a bank loan. These types of lenders are most at risk in an economic downturn.

Which sector will be most impacted by the coronavirus outbreak?

Jaramillo: I think the commercial market will be the most impacted. Before the pandemic, the commercial market, especially retail, was weaker than the multifamily sector. The closures of several national tenants further indicate that the commercial market was headed into a downturn as the need for e-commerce continued to grow. 

WHAT BORROWERS CAN DO

How can multifamily lenders and borrowers best navigate current events?

Druey: The most important ‘do’ right now is to communicate with your banker. Borrowers should be mindful of having a plan they can share with their lender. This includes addressing specific needs, whether its cash flow or payment deferral and what they’ve already done up to this point. Based on the current situation, how long can you stay in business given existing expenses? Do you have reserves for another use that can be reallocated in the short term? What does your current rent roll look like based on the delinquencies at your property today?

Jaramillo: A lot of multifamily lenders are already offering discounts, abatements and reductions on mortgage payments. It’s important to establish a procedure to provide relief for landlords. If landlords can demonstrate the impact from the rents received, then a plan can be created that can be applied evenly to all borrowers.

What LENDERS SHOULD DO

Jaramillo: Don’t ignore requests for relief on mortgage payments. Don’t offer assistance to only some of your borrowers. 

What can you tell us about the legal implications of the pandemic?

Jaramillo: There will be a lot of litigation involving force majeure clauses in commercial leases. We anticipate the majority of litigation will revolve around how much rent should be abated, forgiven. As of now, there is no legal authority for the government to require that landlords give their tenants any discounts on rent. Private contracts between landlords and tenants control these transactions and a lot of them will inevitably end up in litigation. Likewise, there will be an increase in disputes between lenders and borrowers who were unable to reach an agreement from missed payments.

What does the $2 trillion federal relief package mean for the multifamily lending sector?

Druey: The federal stimulus package means little, unfortunately, for the multifamily lending sector. Much of the buzz is surrounding the payroll payment plan, which is designed to get people back to work. However, there are other programs that multifamily owners/developers can apply for that may be better suited to assist with the operating expenses for these properties.

Jaramillo: In my opinion, not much, but it does offer some relief in terms of SBA loans. Hopefully, the next package will offer relief for the multifamily lending sector, which is sure to come soon.

What are the key benefits of the CARES act?

Druey: The CARES Act is a great way to jump-start the economy by incentivizing business owners to put employees back on payroll as quickly as possible. On the surface, this isn’t directly related to the multifamily sector, but what we’re seeing is that there are indirect links throughout every industry. If people are able to go back to work, they are able to make rent payments, which in turn benefits the multifamily owners and lenders. If we didn’t have the CARES Act, workforce housing would lag for several months as we waited for businesses to resume to normalcy.