CMBS Loan Modifications – Who Should You Call?

You are a borrower with a multimillion loan. The bank where you borrowed the money has long ago sold the loan to a Commercial Mortgage Backed Securities or CMBS trust. Worried about falling occupancy or even hoping for better terms, you decide to seek a loan modification. What should you do?

Going to the master servicer won’t do any good. Their duties are limited by the trust documents to collecting mortgage payments and insuring that taxes and insurance is paid. They have no authority to modify loan terms.

A recent article in the Commercial Property Executive suggests, “If a default is imminent, the first step for a borrower is to formally request a transfer to the special servicer.”  While we respect the author of that article, Jay Maddox, we urge caution.  Unless you are truly in danger of imminent default, contacting the special servicer should never be your first step.

Contacting the special servicer can have severe and unintended consequences. Even innocently going to the master servicer to seek a modification can backfire. Often the trust agreement or established protocols mean that a mere misdirected inquiry to the loan servicer is enough to get the entire loan sent to special servicing.

Special servicers have a tremendous amount of power. And depending on the special servicer, that power is often misused and even abused. We have witnessed or heard horror stories about some of the larger special servicers such as LNR Partners, CWCapital and C-III. While it is true that the special servicer has the power to modify loan terms, they also can make the borrower’s life a living Hell.

Special servicers typically have the authority to immediately step in and collect rents, direct how payments are applied and even approve leases. What started as a simple CMBS loan modification becomes a fight to survive. In one case, our client came to work one morning to find the police on the premises while the servicer changed locks, took files and installed a new property manager.

The typical CMBS trust is divided into multiple tranches or layers. Think of a big layer cake. The lower the tranche is in the trust’s hierarchy, the more at risk they are in the event of a default. And typically the bottom tranche – the one most at risk – gets to pick the special servicer. Sometimes the special servicer also owns one of these tranches and serves as the trust’s “controlling class representative”.

These arrangements often end up with conflicting loyalties and interesting outcomes.

Here is something else to ponder. If you are seeking a loan mod because you are seriously underwater, the special servicer has more of an incentive to work with you.  But if the property has significant equity, the special servicer may want to push you into a default knowing it can acquire the property for its own account. Yes, that sounds backwards but its true.

If you are broke, you may stand a better chance of getting better deal because if you go under the lower tranches are left with nothing. If you have plenty of equity and reserves, however, the lower tranches know they are getting paid no matter what.

There is another dynamic at play that also bears mentioning. Special servicers earn large fees but those fees stop once the loan no longer requires special servicing. They have a financial incentive to keep you in their grips.

One would think that special servicers have a duty to the entire trust to rehab the loan and keep the borrowers’ solvent. That is not the way it works, however.

Conflicts are especially bad when the special servicer decides it wants your property. That can result in the special servicer trying to drive down the value of the property. The more cash they can squeeze from the borrower, the more likely of the borrower going under.

Process for Seeking a CMBS Loan Modification

So what do we recommend?

First, find a knowledgeable lawyer with CMBS loan modification experience. There aren’t many. Going to the special servicer alone is fraught with peril. One wrong comment can cause the special servicer to swoop in and take control of your property. Because most trust agreements give them the right to allocate payments, they can quickly wipe out the property’s reserve accounts and immediately put you in default.

Many loans today have clauses that allow a default to be declared even if the borrower never missed or was late on payments. Just having the servicer feel “insecure” can be enough to call the note and force the borrower into default.

A good lawyer can figure out who are the real parties in interest and where their loyalties are. They also know what they can say that won’t trigger a default.

Next, be wary of pre-negotiation agreements or “PNA’s.” While these agreements typically allow the parties to have off the record discussions, most PNAs also requires the borrower to waive any claims it may have against the noteholder and servicer.

Summary

CMBS loan modifications are not easy. The deck is clearly stacked in favor of the trust (note holder) and servicers.

Getting a loan modification isn’t easy but can be done. Unfortunately, we often don’t see these cases until after a borrower has tried to reason with the servicers and failed. We know of one borrower who sought a loan mod and was told by a servicer to be late on a payment simply so the loan could be transferred to special servicing. He did. 

Because his property had tremendous value, the fight was on. Not only didn’t he get his modification, the entire ordeal took years of court wrangling and millions in special fees, default interest and the like. He won and got his property back but died before he could finish pursuing his claims against the servicers.

If you are facing a default, being unfairly treated by companies such as LNR Partners, Freedom Mortgage, CW Capital and others, or simply want obtain a CMBS loan modification, call us. All inquiries are protected by the attorney – client privilege and kept strictly confidential.

For more information, contact attorney Chris Katers at [hidden email] or by phone at (414) 777-0778. The author of this post, attorney Brian Mahany, can be reached at [hidden email]. You can also use the search engine feature of our blog or visit our CMBS loan modification page. We represent borrowers seeking modifications and those facing foreclosure. We sue banks and servicers and banks when necessary but never take cases for the banks.

MahanyLaw and Judge, Lang & Katers – America’s Lender Liability Lawyers – “We Sue Banks

[Please note, we receive at least a dozen calls a day from homeowners facing foreclosure or having problems with home loan servicers such as Ocwen. We are unable to take these cases. Our residential / consumer practice is limited to the occasional class action and whistleblower cases brought insiders with knowledge of wrongdoing. We are presently considering a possible class action against Nationstar, a residential servicer. If you have encountered difficulties with Nationstar, contact attorney Brian Mahany directly.]

Related topics: C-III | CMBS (18) | CWCapital (7) | LNR Partners (9) | Nationstar | freedom mortgage | loan modification (9)