2013: Borrower Negotiations with Special Servicers Grow Challenging

20th December 2013 · Comments Off

After a few in-depth conversations within our Servicer network we thought it might be helpful to outline this topic of particular interest to many of THG’s clients.

If you ever tried to negotiate with a Servicer on your own behalf during 2013 and came up empty, here are some of the factors that have worked against you:

  1. Default rates are at a 3-year low, which has significantly lightened Servicers’ caseloads. Lighter caseloads permits Servicers to be more cautious with the cases they do have. To compound this, many Servicers believe commercial real estate values are on the rise, so to avoid losses, they are even less willing to negotiate one-on-one with Borrowers.
  2. A/B note modifications have traditionally been a potential win-win alternative solution, but Servicers are even revising the acceptable parameters on their A/B note mods. In our post on A/B note modifications earlier this year, we described the A note piece of the modification as being comparable to the property value. And that is traditionally a feature of an A note. But now we’re witnessing a shift: major Servicers we talked to are currently requiring A notes marginally higher than the current fair market value of the real estate. This new requirement makes some A/B note modifications a less appealing alternative for Borrowers who do not believe there is upside value in their property. (On the other hand, A/B note stratifications work well when both parties work together and agree to a “fair sharing” of the value appreciation.)
  3. Besides Servicer factors, there are Borrower-specific factors also contributing to the impasse:
    • In general Borrowers continue to misunderstand how Special Servicers operate, the culture of their business, the limitations imposed by REMIC’s and the Servicer’s motivations in a fluctuating real estate environment. Servicer responses often seem unpredictable to even the most sophisticated real estate owners.
    • When Servicer engagement could have some value, many Borrowers simply don’t know how to ferret out the “deal” and fail to strike when the iron is hot.
    • Some Borrowers–whether they realize it or not–are over-leveraged, have little ability to negotiate, and no access to capital, making them unattractive to any Servicer.

In this lower-traction environment, does using a Borrower Advocate like THG give you any real advantage with the Servicers versus going it alone?

A strong Borrower Advocate paves the way and sets the tone for the Servicer conversation and may even determine whether or not any future conversations take place. THG provides seasoned leadership with direct lines of communication to Special Servicer asset managers and senior management. Contact us today and get us working on your behalf.

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