Servicers Brace For Multifamily Loan Challenges

Special servicers who tend to troubled loans across all of the commercial property types are gearing up for an increased workload and greater numbers of complex cases in the coming months, but special servicers dealing with government sponsored enterprise (GSE)-insured multifamily loans must take into account an additional set of considerations.

Working with multifamily loans insured by the GSEs and the Federal Housing Administration does, of course, offer certain advantages – namely, lower delinquency rates among comparable mortgages in the commercial mortgage-backed securities (CMBS) space.

Agency loans and their associated documentation and rules, however, necessitate particular practices from special servicers, explained the industry experts who addressed the topic of special servicing implications for the multifamily market at the recent Mortgage Bankers Association Commercial/Multifamily Servicing and Technology Conference in Chicago.

Multifamily mortgages themselves are currently subject to increasingly uncertain sector conditions. In servicing firms' portfolios, on their watchlists and in the broader market, ‘We do see some warning signs on the horizon,’ remarked Kevin Donahue, senior vice president of the special servicing group at Midland Loan Services Inc.

Multifamily loan delinquency numbers remain low by most standards, but the CMBS side has posted a threefold increase over the past year, and overall tallies have spiked, according to Donahue. In addition, because commercial real estate cycles typically lag both general economic trends and residential real estate cycles, this upward movement for delinquency figures is expected to continue.

Despite the recent invasion of empty single-family homes into the rental pool, actual occupancy trends in most multifamily markets have held up or slightly improved during this subprime-implosion area, Donahue reported.

On the other hand, Vin McMaster, vice president at Wachovia Multifamily Capital Inc., said that because the most severe subprime woes were concentrated in certain pockets of the country, the crisis has not had any ‘significant effect’ on multifamily as a whole.

Assets appearing on servicers' watchlists these days are most likely to have landed there as a result of ineffective, inexperienced or absent property ownership. Caring for multifamily buildings tends to require a more hands-on approach than is the norm for many other commercial property types, the panelists pointed out.

Deferred maintenance issues specifically have contributed to a sizeable number of problems, noted Tony Perez, senior vice president at Capmark Finance Inc. The recent rise of loan extensions' popularity due to borrowers' limitations in the current market is predicted to create trouble as well.

Given all of these trends, what are today's best practices for multifamily special servicers?

When a default pops up, ‘The first step that you take, obviously, is to do your own work and figure out why the loan is really there in the first place – what's the root cause?’ explained Donahue.

The problem may be borrower-specific, property-specific or market-specific, or it may be reflective of any combination of these factors.

{OPENADS=zone=16}For example, he continued, a troubled property's tenant base may have been largely dependent on a single local place of employment that recently shut its doors. Property experts for individual markets can be especially useful for evaluating current asset worth. Additionally, Donahue recommended ‘constantly drilling’ asset managers on properties' current values and values on a schedulized basis.

If the loan involves the Department of Housing and Urban Development (HUD) and its characteristically localized rules, servicers aiming to modify or reassign a distressed loan should arm themselves with three specific tools: patience, a stress ball and antacids, quipped Perez.

Generally, in these situations, ‘You can actually restructure the loan, but there is a process that you have to go through,’ he noted, adding that reassignments – where HUD takes in the loan and the borrower receives cash – are extremely rare.

Complex loan structures incorporating multiple layers of mezzanine debt, preferred equity and other elements that often found their way into multifamily loans in recent years also require an extra dose of persistence and caution. Fortunately for special servicers working with Fannie and Freddie deals, the GSEs have only recently introduced mezz deals to their repertoire – limiting any noticeable impact on servicers so far, said McMaster.

But special servicers coping with a mezz-infused delinquent loan, especially a large-balance floating-rate deal, must keep an eye on the responses of the loan's other involved parties.

‘If you have an asset that is performing below expectations, the mezz debt lender is more inclined to let things keep going. Chances are, they don't want to escalate, because if they escalate the situation, it forces a hard lockbox,’ Perez explained. In reporting, the lender would thus need to classify the asset as nonperforming.



WHAT: The subject property consists of two multitenant Class A office buildings totaling 255,837 square feet. The buildings, constructed in 1999 and 2001, are currently approximately 99% leased. Anchor tenants include Potash and Merrill Lynch.

WHO: CWCapital, a full-service national lender to the commercial and multifamily real estate industries, provided the financing through its capital markets group.

$$$: $46.5 million.

TERMS: The five-year refinance loan carries a fixed rate. The loan represents the firm's first closing through its balance-sheet lending program.

CWCapital: (781) 707-9300.


WHAT: La Sierra Apartments measures 135,600 square feet and contains 152 units. The property is located less than one mile from I-35 in New Braunfels, which has recently seen tremendous growth.

WHO: The Dallas office of Love Funding secured the financing.

$$$: $11,196,800.

TERMS: The nonrecourse loan, secured through the HUD 221 (d)(4) program, features a fixed interest rate of 6.15% and a 40-year amortization. LTC: 90%.

Love Funding: (972) 458-2900.


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