Lenders must decide who is for real

Real Estate Weekly, June 23, 1993 by Richard R. Pergolis, Jerry Swartz

If there has been common experience among real estate owners of all types in the last two years, it has been the realization that banks have been willing to take less than they were owed on various kinds of property and in various circumstances.

Not surprisingly, these owners have asked themselves, "If others are getting off at 50 cents on the dollar, why not me?"

Whatever the justification for the question, it has presented a new kind of problem for lenders. Who is for real when they say they can't find the money for the mortgage on the farm?

Banks are getting tougher about who is really in trouble and who is crying wolf. Now that some of the back log has been dealt with, banks are not afraid to take back property, and they're willing to call a bluff.

Lenders today are far more apt to send in their own specialists to evaluate a borrower's position than to accept what they're told. While this has meant a thriving business for consultants, appraisers and professionals skilled at construction analysis and accounting, it has saved lending institutions millions.

Lenders have all learned a great deal about how to deal with foreclosures and REO property, and this puts them in a position of strength going into potential work-out situations. There was a time when lenders would capitulate to borrowers out of fear of ending up with a property. That is much less the case today.

Borrowers are finding a much hardened attitude at banks when their loans come due, as well. The problem is particularly acute for borrowers whose typical five-plus-five 10-year loans that were the staple of the 1980's are coming due. With appraised values often below the mortgage amount, borrowers are typically being offered three choices as a condition to refinancing: An extension of the current loan; a partial pay down to bring the loan within the loan to value ratio; or the introduction of a third party investor to put up the money to cover the shortfall. Each of the options has its pain for the borrower, and in every case extensive negotiations are required, often with the borrower hiring his own professional consultant to work out the details.

The extension or an outright rollover often includes either a personal guarantee or faster amortization where it didn't exist before. In all cases, work outs only work for borrowers deemed a good credit risk.

The last scenario, the third party investor, is what lenders often favor, though it can be the bitterest pill for owners to accept. New investors often want their own position secured with a second mortgage or a disproportional piece of the equity.

Because debt financing is so scarce, lenders have learned that they have a kind of clout they either didn't have or were hesitant to exercise in the past.