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Here is another sign of the times with regards to the concept of the “Strategic Default”. If you are underwater on your mortgage it would appear the lawyers are lining up to “help”.

I just ran into this website with it’s “Pay or Go” calculator. http://payorgo.com/

You plug in your numbers on what you owe and what you pay and it will tell you whether you should keep Paying or Go … walk away and trigger your “Strategic Default”

Is this the 2009 property specific version of “ambulance chasing”? I am certain this law firm could help you if you decide to “go” rather than keep paying. And this all begs the question is walking on your mortgage now socially acceptable. You be the judge and as one reader emailed me … “whether it is socially acceptable or not, the question of whether it is ethical remains.”

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In this economy, where many individuals and businesses bought at the peak and are now under water on their loans, is it now Socially Acceptable to walk away from those loans? Are we to the point where a “strategic default” – as this has come to be known – is simply idle water cooler banter amongst investors.

Today Bloomberg announced that Morgan Stanley is doing just that for the second time in 2009. And the Wall Street Journal has had a series of articles on single family home owners and the epidemic of strategic defaults in home loans

More on Morgan Stanley …

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The Wall Street Journal ran a lead article yesterday on the tight link between the current apartment lending market and our crippled friend Fannie Mae. Here are some interesting stats …

• In 2006 Fannie Mae originated  just 34% of apartment loans
• In 2008 that share rose to 84% !! – my oh my
• Current delinquencies are at only 1.6% on the $4.5B of apartment loans that mature in 2010 – good
• Fannie and Freddie only back $300B in apartment loans … as opposed to the $5 Trillion in SFR loans they hold – good
• $180B of Fannie’s apartment loans were originated at the top of the market in 2007 – not so good

So riddle me this …

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We are all waiting for the backlog of distressed and foreclosed commercial properties to thaw out a little and become available for purchase at the steep discounts only a recession can cause. Things have been frozen for a while …

• Lenders not wanting to write down the value of their portfolios to acknowledge the drop in value … especially if the property is worth less than the loan … Ouch!
• And no lenders willing to loan new money on purchases of distressed assets

AND we have been under the assumption that once lenders are willing to accept the losses and new money becomes available to purchase distressed properties … this whole mess would thaw. Then we could snap up performing assets at once-in-a-lifetime prices.

BUT WAIT … the FDIC may have just thrown the whole system back into the deep freeze. Globe Street’s Tony LoPinto reported yesterday that the FDIC has made some rule changes deep underground in their infrastructure that could significantly delay the thaw in this frozen market of distressed commercial real estate. Here is a quote:

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Today’s Wall Street Journal reports on a government run auction of $5B in Commercial Property Loans seized from the failed Corus Bank.

This is an all-or-none sale of the loans behind over 100 Commercial Development Projects including a number of failed Condo Projects in states like CA, NV and FL. The FDIC is not allowing the developers to buy back their own loans … the only way to buy is to take the whole portfolio and the big sharks are lining up to make their bids. It is a sweetheart deal as well since the FDIC will hold a 60% stake after the sale AND provide financing.

WHY IS THIS SALE IMPORTANT ?

There has been so little deal flow in Commercial Property this year that valuations are very hard to come buy …  we are in uncharted territory with no Comps to give us a ballpark for valuation. This sale will set a benchmark the whole Commercial Property Industry will watch closely. Here’s what the pundits are expecting.

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In today’s market, every financing option needs to be in play. The Owner Carry is one option you must learn to use when it is available. And sometimes you have to be creative to “Git Er Done”.

In this post, let’s look at ways you can get what amounts to an Owner Carry … even if the Lender won’t allow a traditionally structured Owner Carry.

With a 100% Carry you are golden …

When your Seller is giving you a 100% Owner Carry – meaning you give them a down payment and they carry all of the remaining debt – you don’t need a Lender. You are free to negotiate whatever terms you need to get ‘er done.

And if you are getting both an Owner Carry and a Conventional Mortgage, things can get sticky on occasion.

First, an Owner Carry is always much more difficult to obtain when you are assuming existing financing. It just is … plain and simple. You will want to look long and hard at any assumption that requires an Owner Carry because it is definitely like swimming upstream!

Remember: Carry + Loan = Combined Ratios

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With commercial real estate sales volumes down 60% nationwide, it seems as if almost every market is slowing down. Lenders are being much more conservative … and sellers are hesitant to accept that their properties are now 5 to 10% less valuable than this time two years ago.

Here is a tool that may help you be the “Larry the Cable Guy” in your local market and “Git a Deal Done”. You know it already…

It’s called the “Owner Carry”
The owner carry is when your Seller (the current Owner) “Carries” part of the debt you use to purchase their property. This is usually in the form of a note that sits in second position behind the Mortgage.

When you purchase a property with an Owner Carry, you basically have two loans. The first loan is from the bank or other lender and is usually the largest, the second loan you owe to the Seller.

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Power-Play:
 
If you find a Seller who owns their property free and clear, you can negotiate for a 100% owner carry. In this situation, you provide a down payment and the owner carries a single loan. You don’t even need a bank for this transaction.
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How to negotiate an Owner Carry …

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How tight are the Commercial Lending Markets?

If you are lucky … you get a squeaking sound like a rusty gate. That’s if you are lucky and the market is moving at all … even if it is just that little squeaky bit.

For most of us the Commercial Lending Markets are not moving at all. Here are two examples…

1) Globe Street today ran an article stating that Commercial Property CMBS Loans will fall to ZERO in 2009. These are the loans that in the “good old days” were packaged up into securities and sold by the originators and provided the majority of larger loans prior to this credit crunch. They used to be king of the Market with $230 Billion in originations in 2007 … crashing to $30 Billion in 2008 … and now ZERO.

Even worse … $160 Billion in Commercial Loans come due this year … how in the world are they going to get funded in this lending environment.

2) Big Pharma can’t even get a break. Read the rest of this entry »

In the January 8th edition of the Wall Street Journal article “Commercial Property Loses Shelter” the author details the rising rates of defaults on commercial loans. The defaults are mirroring the Residential Markets … although the default rates are much lower. Not surprising given the cratering of our economy … and the article goes on to tell us how people got in trouble … this is interesting stuff!

WSJ: “An unusually high number of the underlying CMBS loans that are going bad were made and securitized in the past three years. That is a sign that investors overpaid greatly for those properties and that underwriting standards were loose. In many cases banks lent money based on future income assumptions rather than current cash flows …”

The Lenders committed the Commercial Real Estate Cardinal Sin: they believed in Proforma Numbers.

We have always taught our Commercial Property Mentor clients the rule: NEVER buy on Proforma … and now here we find bankers lending on Proforma numbers. No wonder these loans are going sour in the current economy. You must Always Buy on Actuals!

EXAMPLE: Read the rest of this entry »