At the time of the securitization in CMBS a few years ago, excessive collateral values resulted in reassuringly low loan-to-value ratios. Then there were problems.
By Wolf Richter for WOLF STREET.
What options exactly does Mall-REIT Washington Prime Group offer [WPG], now reduced to a penny floor, than another of their malls, the 850,000-square-foot Oak Court Mall, anchored by Dillard’s and Macy’s, which was once the premier shopping mall of Memphis, TN, has struggled to settle the mortgage payment ? The mortgage is secured by the mall property, and if the going gets tough the landlord can just let the lender run the mall and walk away. Jingle mail. But in slow motion.
The 240,000-square-foot section of the mall where Dillard’s Store is located serves as collateral for a $ 35.6 million mortgage wrapped in Commercial Mortgage Backed Securities (CMBS) that investors own. Dillard’s lease expired in August. Dillard takes about 21% of that portion of the collateral.
That 240,000-square-foot section of the mall – the security – was valued at $ 61 million in 2014 when the mortgage was wrapped in a CMBS. At the time, given the $ 35.6 million loan and $ 61 million value, the Lending Ratio was 58% and investors felt very safe. How can you lose money on something like that?
When the mortgage was transferred to CMBS, it was split into two parts: A $ 21.4 million part was packed into a CMBS [WFRBS 2014-C21] and makes up 1.82% of it; and a $ 14.3 million piece was wrapped in another CMBS [WFCM 2014-LC16] and makes up 1.61% of it. Wells Fargo is the servicer of both CMBS.
Then came the meltdown that started around 2015, and then came the pandemic. Wells Fargo sent the mortgage to a special servicer to deal with the problems in the mall. The Special Servicer has agreed to put the mortgage on a deferral agreement instead of marking it as default. The mortgage is due in April 2021 when the balloon payment for the full amount ($ 35.6 million) is due.
The new valuation, commissioned by the Special Servicer, has now lowered the value of the collateral to just $ 15 million – less than half of the mortgage balance, according to a note from Trepp today. But the entire $ 35.6 million mortgage is due in April.
You can see the writing on the mall, so to speak: Future Jingle Mail. There was no way anyone would pay off a $ 35.6 million mortgage on a $ 15 million property.
Trepp, who tracks CMBS, searched the Special Servicer Notes and found nearly 100 jingle mail candidates with CMBS loan balances totaling $ 3.9 billion as of October 21. Properties and 7 other property types.
The list includes borrowers who have discussed with the Special Servicer to voluntarily surrender the property to the lender (a “deed instead of” foreclosure) in order to fend off foreclosure proceedings, but whose properties have not yet been foreclosed.
A replacement deed is a document voluntarily signed by the borrower and lender that transfers the title of security from the borrower to the lender in order to relieve the borrower of the mortgage debt. A replacement deed avoids the lengthy and costly foreclosure procedure.
Discussion of a replacement deed can also be used as a negotiating tactic by the borrower to get better terms on the loan, and a discussion of a replacement deed in the Special Servicer Notes does not necessarily mean that the property will be handed over to the lenders.
Trepp cites a jingle mail candidate on that list: the $ 76 million mortgage covered by the 448-room Hilton Houston Post Oak in Houston, TX. The hotel was built in 1982 and renovated in 2014. It had a listed value of $ 126.1 million when the mortgage was securitized in a CMBS in 2014, just as the oil boom was peaking. Then came the oil spill. Then came the pandemic. In May the mortgage was sent to a special servicer who commissioned a new appraisal. In October came the new appraisal: It lowered the value to $ 57.5 million – below the amount of the mortgage ($ 76 million).
Trepp noted in the comments from Special Servicer that the collateral from August onwards was “probably DIL” (Deed-in-lieu).
What these jingle mail candidates have in common are the following factors: collateral values, which now appear inflated when the mortgage was securitized a few years ago; Risks related to the mortgage payments or balloon payment that the mortgage sends to the Special Servicer; a new appraisal commissioned by the Special Servicer, which lowers the value of the collateral well below the loan amount. At this point, the whole calculation breaks down for the owner / borrower and it is time to let the lender take the collateral and let the lender figure out what to do with it.
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