New bankruptcy laws and foreclosure

[powayseller]

What do you mean about borrowers having their loans called because their loan amounts exceeded the equity? Was this really done?

[DiveUrge]

Of course it was. The institutions went belly up and the loans got re-valued based on current appraisals (most done without any inspections, simply comps). It had to get sold and if the loan happened to be way way upside down it had to get reset. The borrower has the opportunity to settle the entire outstanding loan amount. This is in the fine print in your loan documentation where the lender has the right to call in the loan.

[powayseller]

I remember reading in my loan docs that the lender could call the loan at will. It made me weary at signing, but we just took a deep breath and signed anyway. I didn’t realize lenders actually did this. That would make the decline even worse, because we have so many overleveraged homeowners. Even if you are timely on your mortgage payment, your loss of equity coupled with your lender’s demise, two factors outside your control, can bring you down. That’s not fair at all. Now I’m a renter, but it’s unfair to the homeowners.

[Mr. Drysdale]

This can only happen on commercial property, not residential (1-4 unit properties). Most commercial lenders have covenenants in their loan docs that require you to submit financials, rent rolls, etc., annually on the borrowers, guarantors and collateral, if things look bad, it could constitute a default. If anyone ever read every line in a set of commercial real estate loan documents, it would scare them, but institutional lenders wouldn’t make commercial loans without those assurances. If you want to avoid those kinds of loan covenants, you have to use a private or hard money lender.

[Mr. Drysdale]

If you check around on many of the real estate blogs, you’ll find, despite the urban legends some are perpetuating about banks looking to foreclose on borrowers, that this is the last thing any lender wants for completely self-serving reasons. The more REO and/or non-performing loans a bank has on its books, the closer they will get to that magic number (determined by a banking regulator dictated formula) whereby the State or Feds are called in to intercede upon that bank. They can issue an injunction against any more lending activities till that bank gets its house in order, or can simply shut them down.

Banks only foreclose when they have to. If a bank has loans out on properties that are now overencumbered because of market conditions, how does it help the bank to foreclose on those borrowers who are continuing to make timely payments? It doesn’t.

The instances where this has ocurred has been on commercial lines of credit, construction loans, forward commitments, etc., and it’s totally normal on those kinds of loans products because they are essentially conditional commitments to lend, and if the conditions aren’t, or are unlikely to be met, terms get changed, or worse yet, the bank pulls out. Some people, not implying that about anyone on this site, think of banks as government agencies or charitable organizations, instead of businesses seeking to preserve their solvency, keep employees employed and generate a return for stockholders who took risks investing in those institutions. They have to watch out for their interests too : )

[Bugs]

One thing about cap rates: if using a mortgage/equity model, the low interest rates can affect the mortgage side of the cap rate, and the anticipated reversions can affect the equity side – hence the rationale behind some of these <5% cap rates. Increase the commercial interest rate and decrease the anticipated increases and we could be back to 9% cap rates in a flash.

[Author]

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