They are based far from Wall Street — Overland Park, Kan., Irving, Tex., Horsham, Pa. — and despite their expertise in commercial real estate, they drew little attention during the industry’s boom years.
They are special service firms, experts in managing troubled commercial real estate loans. And like pawnbrokers, shoe repair shops and bankruptcy lawyers, they saw their fortunes rise during the recession. Thousands of loans for office parks, shopping malls and apartment complexes across the country have fallen into default and piled onto the servicers’ desks, and they are now determining the fate of billions of dollars of bad real estate bets made before the crash.
June 30 (Bloomberg) -- Gary Garrabrant, chief executive officer of Equity International, talks about the outlook for the commercial real estate market.
A look at distressed commercial mortgages.
How the servicers handle these loans will help steer the fate of the real estate industry and the national economy, not to mention the investors and borrowers who are still unwinding from the sticky situations they found themselves in after borrowing big during the boom years.
Take Beacon Capital, a private Boston firm that by spring 2010 was in trouble.
Beacon had bought 20 premium office properties in the Seattle and D.C. areas in 2007 for $6.35 billion. But like many firms during the boom, Beacon borrowed heavily to buy the portfolio, and after the crash, ratings agencies declared that a $2.7 billion loan Beacon took out on the properties was underwater and distressed.
Beacon’s lenders transferred the loan to a servicer to determine whether it should be salvaged or sent to foreclosure — much like thousands of other loans. About $90 billion in U.S. commercial real estate loans are now in the hands of a dozen or so special servicers. And with buyers still falling behind on loan payments, many of the top servicers have become the darlings of some of the country’s savviest investors.
With so many billions of dollars in loans under their management, however, there is growing scrutiny of servicers, including speculation about whether they are really doing what is best for the lenders they represent. Regulators including the Internal Revenue Service, the Treasury Department and Congress have paid increased attention to servicers’ operations. Some top firms are now owned by companies that also are buyers and owners of real estate, raising the prospect of a conflict of interest. And thousands of loans remain in a sort of purgatory, stalled between foreclosure and repayment.
A glut of debt
The delinquency rate for securitized commercial real estate loans — or the portion of loans for which payments are at least 30 days overdue — reached 9.7 percent in April, the highest level on record, according to the research firm Trepp. Many borrowers have slowed or stopped their payments. They hold on in the hope — given the long and ongoing period of low interest rates — that lenders will agree to more favorable terms or that property values will improve.
The Federal Deposit Insurance Corp. began advocating for “prudent commercial real estate loan workouts” more than a year ago, in effect suggesting that bankers accept the fact that many of their real estate loans would never be fully repaid and agree to more lenient terms with their borrowers.