Commercial mortgage servicers have the same goal as their residential counterparts when it comes to borrowers in forbearance plans: get them back into performing status. Failing that, prepare them for loss mitigation options.
Sabal Financial is one commercial mortgage lender and servicer that's hard at work on offering their borrowers such options. The Irvine, Calif.-based firm has loan sizes that range from $1 million to $30 million across multiple property types. But it most frequently lends to multifamily owners and is a Fannie Mae, Freddie Mac and Federal Housing Administration lender.
Below is a discussion with company CEO Pat Jackson on how it is working with its clients and investors during the pandemic to craft a resolution that allows all to continue afterward. The interview has been edited for length and clarity.
The forbearance rules in the CARES Act apply to
It's been shockingly lower than what we thought it would be. No one knew. Was it going to be 50% of our portfolio, 100% of our portfolio? No one knew. And in April it was 4%, a very small percentage; and then in May it was half again what we saw in April. So April was the big surge and then in June we saw only two loans come to us and ask for forbearance.
You know, you simply can't just say "sign me up for a forbearance, I'm ready to not pay my mortgage." You have to go through a means test to make sure that you in fact have a need, a hardship. I don't know what the ultimate number will work out to be, but it is substantially lower than what we had anticipated across the industry, which is encouraging. People have continued to pay their mortgages.
But there is still a larger amount of distressed borrowers than what you would normally see?
Absolutely. But it's actually not distressed. You have responsible owner-operators calling and saying "I want to talk about getting a forbearance." Many of them are saying "I want to make sure that I'm not being viewed as in default for nonpayment" and the answer is absolutely not. A lot of the borrowers that even got a forbearance are finding out, "Wait a minute, I can actually make my payments." We're finding people actually making payments to stay ahead and they aren't technically in default.
How are you advising your borrowers on how to work through this process?
We're unique in the industry because we are both the lender and the servicer and, in most cases, we own the B-piece of the security. We frankly have more skin in the game to try to work with these borrowers to keep them performing or so that they can get their feet on the ground during this uncertainty.
In the case of our conduit businesses, which is a much more diverse product suite — we have everything from multifamily to hotels — the most challenging asset classes are going to be hotels and retail. Those loans typically involve much more of a restructuring and discussion with the borrowers than simply saying "you can have a forbearance." So in those cases, we’ve got to be a lot more creative about how we work with borrowers to help them weather what will likely be a longer-term recovery for them. And that's what we've been doing.
Each loan is handled on a case-by-case basis and each requires a lot of consideration to do before ultimately coming up with a solution. But what we're not trying to do is immediately just
How concerned are you about servicers' advancing obligations?
In the case of Fannie Mae, we as a company make that payment, regardless of whether the payment is received or not. Freddie does it a little differently, where they actually advance on behalf of the servicer, on behalf of the trust. The difference is instead of us actually having to put cash out, we just don't collect the servicing fee until later when those payments are made whole. So it's a little less of an impact financially to the servicers for Freddie. You still have to do all of the work. You still have all of the obligations of the servicer.
So it's a little bit tougher with Fannie Mae and I think that's pretty universally understood in the industry as to the difference between those two.
As a company, you need to have the financial wherewithal to be able to weather through that. So, when we started looking at the impact of the unknowns about nonpayments and forbearance, part of the consideration was to make sure we're ready to step up and cover it under our obligation as a servicer.
What do you see ahead for multifamily lenders, after the forbearance period has ended?
I think that's what the whole entire commercial real estate industry is holding its breathe for, waiting to find out if these borrowers can then go back to a reperforming status. Or, will there be another level of scrutiny and requirements to work on with these borrowers? If they can't comply, the ordinary process for nonperformance kicks in. In the
It's going to be up to every servicer to go through and do a deep analysis at the property to determine how distressed it is and what options are available for the borrower to keep that property current or not current and restructure it. That's a loan-by-loan triage that needs to occur.
We really want to make sure we understand the exposure at a loan- level basis based on the fundamentals of that property.
The best news for us is that the borrower pays off their loan at par per the terms we signed with the borrower when we took the loan out in the first place. That's a home run for everyone.
