REAL ESTATE NEWS

FORBEARANCE STILL KEEPING WORST OF HOTELS’ PAIN AT BAY

Published on Thursday, November 19, 2020

These forbearances are putting downward pressure on CMBS delinquencies, with many loans reverting to “current” status.

 

While there is still a lot of pain in the hospitality sector, October marked the fourth straight month that the overall lodging delinquency rate has fallen, according to Trepp.

How is that happening, given the pain the sector is in?

Simply put, lenders are granting forbearances to borrowers. During the pandemic, more than 64% of all forbearances that have been given in the CMBS market are on hotel loans, totaling more than $8.5 billion, according to Trepp

These forbearances are putting downward pressure on CMBS delinquencies, with many loans reverting to “current” status. Additionally, borrowers are being authorized to use reserves to bring debt service payments up to date.

The falling delinquency rate doesn’t obscure real problems with lodging loans. Since February, the percentage of lodging loans on servicer watchlists rose every month, reaching 45.54% in October. Almost half of all lodging loans are being monitored for potential hardship, according to Trepp.

Earlier, Trepp reported that lodging delinquencies moved up to 24.3%, which was the highest on record for the CMBS industry. It estimated that about 5.5% of the non-agency CMBS universe—more than $31.2 billion across 800 loans—have been granted forbearances thus far, based on September remittance data.

As the cycle plays out, banks will be increasingly reluctant to grant forbearance. Michael T. Fay, principal, managing director and global head of Avison Young’s asset resolution team, told GlobeSt.com in an earlier interview that banks are dealing with their own stresses right now, as many borrowers seek deferrals or new agreements.

With the CARES Act, the Federal government relaxed the requirements on what banks had to keep in reserve against loans. “That allowed banks to make decisions to postpone payments, forbearance agreements and things of that nature,” Fay says.

Eventually, Fay thinks banks will eventually start selling their troubled loans.

“I think you’re going to see a lot of loan sales from the banks, and they’re going to push those loans off to other non-bank investor groups and let them deal with the problem,” Fay says. “That means they don’t have to have reserves for capital, and they don’t have to classify the loan.”

A big part of what banks decide to do will depend on what action the government takes. “I think we’ll start to see more activity and action in the first quarter next year,” Fay says.