Via Wolf Street

At the time of securitization into CMBS a few years ago, inflated collateral values led to soothingly low loan-to-value ratios. Then trouble hit.

By Wolf Richter for WOLF STREET.

What options exactly does mall-REIT Washington Prime Group [WPG], now reduced to a penny stock, have when another one of its malls, the 850,000-square foot Oak Court Mall, anchored by Dillard’s and Macy’s, that was once upon a time the premier mall of Memphis, TN, has trouble making the mortgage payment? The mortgage is secured by the mall property, and if push comes to shove, the landlord can just let the lender have the mall and walk away. Jingle mail. But in slow motion.

The 240,000-square-foot portion of the mall that contains the Dillard’s store serves as collateral for a $35.6 million mortgage that has been packaged into commercial mortgage backed securities (CMBS), and investors own them. The expiration date of Dillard’s lease was back in August. Dillard occupies about 21% of that portion of the collateral.

That 240,000-square-foot portion of the mall – the collateral – was valued at $61 million in 2014 when the mortgage was packaged into a CMBS. At the time, the loan-to-value ratio, given the $35.6 million loan and the $61 million value, was 58%, and investors felt very secure. How can you lose money on something like this?

When the mortgage was rolled into CMBS, it was split into two slices: a $21.4-million slice was packaged into one CMBS [WFRBS 2014-C21] and accounts for 1.82% of it; and a $14.3-million slice was packaged into another CMBS [WFCM 2014-LC16] and accounts for 1.61% of it. Wells Fargo is the servicer of both CMBS.

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Then came the brick-and-mortar meltdown starting in about 2015, and then came the Pandemic. Wells Fargo sent the mortgage to a Special Servicer to deal with the issues at the mall. The Special Servicer has agreed to enter the mortgage into a forbearance agreement, rather than marking it as delinquent. The mortgage matures in April 2021, when the balloon payment for the entire amount comes due ($35.6 million).

The new appraisal, commissioned by the Special Servicer, has now slashed the value of the collateral to just $15 million – less than half of the mortgage balance, according to a note by Trepp today. But the entire mortgage of $35.6 million is due in April.

You can see the writing on the mall, so to speak: future jingle mail. No way that anyone would pay off a $35.6 million mortgage on a $15 million property.

Trepp, which tracks CMBS, by digging through the Special Servicer notes, has found nearly 100 jingle-mail candidates with CMBS loan balances totaling $3.9 billion, as of October 21. This includes 40 hotel properties, 42 mall properties, 5 “mixed use” properties, and 7 other property types.

The list contains borrowers that have discussed with the Special Servicer to voluntarily turn over the property to the lender (a “deed-in-lieu” of foreclosure), to head off foreclosure proceedings, but whose properties have not yet been foreclosed on.

A deed-in-lieu is a document, signed voluntarily by both borrower and lender, that transfers the title of the collateral from the borrower to the lender, in exchange for relieving the borrower of the mortgage debt. A deed-in-lieu avoids the long-drawn-out and costly foreclosure proceedings.

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Discussions of a deed-in-lieu can also be used as a negotiating tactic by the borrower to obtain better terms of the loan, and a deed-in-lieu discussion in the Special Servicer notes does not necessarily mean the property is going to be turned over to the lenders.

Trepp cites a jingle-mail candidate on this list: the $76-million mortgage backed 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 into a CMBS in 2014, just as the oil boom was peaking. Then came the oil bust. Then came the Pandemic. In May, the mortgage was sent to a Special Servicer, which commissioned a new appraisal. In October, the new appraisal came out: it cut the value to $57.5 million – below the amount of the mortgage ($76 million).

Trepp found in the Special Servicer comments that starting in August, the collateral was noted to be “likely DIL” (deed-in-lieu).

What these jingle mail candidates have in common are these factors: Collateral values that now appear to have been inflated when the mortgage was securitized a few years ago; risks concerning the mortgage payments or the balloon payment, which sends the mortgage to the Special Servicer; a new appraisal commissioned by the Special Servicer that slashes the value of the collateral substantially below the loan amount. At which point, the whole calculus falls apart for the owner/borrower, and it’s time to let lenders take the collateral and let the lender figure out what to do with it.

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