Maturity Extensions

A report from Standard & Poor's (S&P) in November 2009 shows that maturity extensions of mortgage securities can help prevent liquidations at distressed levels. Since such extensions are likely to play a significant role in distressed commercial mortgage-backed securities (CMBS) property sales, S&P asked several special servicers to estimate the frequency of extensions. The results showed that between 20 to 50 percent (depending on the servicer) of the loans transferred for imminent or actual maturity defaults between January and September were extended or were being considered for an extension. As a general rule, special servicers were providing maturity extensions to borrowers unable to receive refinancing due to current market conditions. The extensions could give borrowers time to find a refinancing source. The extension also could enable the special servicer to avoid the difficult job of liquidating the loan in the stressed commercial real estate market.

S&P also heard from many sources that such extensions often only delay the inevitable, particularly at a time when values are not climbing and when many expect that distressed asset sales from banks will push values even lower. S&P says its view is that extending well-performing loans with strong current and expected cash flows can help prevent additional expenses and avoid losses that result from attempts to force the liquidation of properties at distressed levels. At the same time, S&P believes that for loans with weak current and expected cash flows, servicers should enforce the provisions of the loan agreement and liquidate the property as quickly as possible in order to limit trust fees and expenses.

S&P also understands that when servicers extend loans, they usually will seek concessions from borrowers in order to create a stronger loan. Concessions might include adjusting the interest rate, implementing a lock-box, posting reserves for leasing or tenant improvements or requiring the borrower to reimburse the trust for special servicing fees.

S&P also reported that an increasing number of fixed-rate matured loans paid off in the third quarter of 2009. More than 60 percent of fixed rate loans paid off compared with 50.7 percent in the first six months. More loans being paid off contributed fewer loans being transferred to the special servicers, with 30.7 percent being transferred in the third quarter compared to 44.8 percent in the first two quarters of the year.

Retail loans experienced the most significant change in payoffs, with 60 percent of matured loans paid off in the quarter, up from 29 percent in the previous two quarters. The 1999 vintage was the most active with respect to retail maturities as 36 matured loans paid off. According to Real Capital Analytics, third quarter retail properties sales rose 36 percent from second quarter levels, representing the first quarterly rise in two years. While this is encouraging, S&P believes that liquidity is still very constrained for all commercial real estate sectors, including retail. S&P expects retail sales to remain low as the sector continues to struggle with rising vacancies and reduced consumer spending. The retail vacancy rate reportedly reached 10.3 percent, the third quarter, the highest since 1992.