Forbearance Over Foreclosure: Lenders Encouraged To Play Nice As Coronavirus Hammers Economy
The global spread of the coronavirus is the unexpected event the U.S. commercial real estate industry feared would halt the country’s longest period of economic expansion. But when rent or mortgages come due, lenders are expected to exercise some level of flexibility to soften the blow.
While these are still early days in what some economists are already calling a recession, banks are expected to take a different tone in this downturn compared to the last. And on Monday, the Federal Housing Finance Agency said landlords with government-backed loans wouldn't face foreclosure if they didn't evict their tenants.
“Unlike the last recession, we’re not the cause of this. We’re just exposed to it,” Dekel Capital Managing Principal Shlomi Ronen said. “Rent relief and government intervention, in my mind, is the critical piece in all of this.”
Health officials and leaders around the world strongly recommend people socially distance to prevent further spread of the virus. Hotels, airports, retail centers and offices are all largely empty as people follow government orders to stay at home for an unknown period of time to take pressure off healthcare facilities and wait out the pandemic. The lack of foot traffic means significantly less money in the pockets of renters to pay landlords or property owners to pay back lenders.
Simon Property Group temporarily closed all its U.S. retail centers through March 29, the REIT announced Wednesday. Marriott’s U.S. and European occupancy levels have dropped to below 25% — a situation more dire than the quarter after the 9/11 terrorist attacks, Marriott International CEO Arne Sorenson said Thursday. Boston Mayor Martin Walsh ordered construction crews to wind down work and secure sites no later than Monday to keep workers safe from the coronavirus, which causes the disease COVID-19.
Landlords say they are already fielding requests for April rent relief. But rent relief hinges on how flexible banks and regulators can be. For now, those institutions are signaling this downturn will be marked more by forbearance than foreclosure.
“We’ve taken the step of delegating some authority to market executives relative to making the decision of putting certain loans that may be amortizing to be interest-only,” EagleBank Senior Executive Vice President and President of Commercial Banking Tony Marquez said. “Then, they would have the ability to defer one payment as we try to assess what is a quickly moving process and stay nimble relative to the regulatory relief that should be clarified in the coming days and weeks.”
Relationship managers at the Bethesda, Maryland-based bank have spent the last several days reaching out to those in industries feeling an immediate business impact from coronavirus precautionary measures, EagleBank Executive Vice President and Chief Credit Officer Jan Williams said. The bank has focused on clients in hospitality, retail and events.
The managers get a sense of clients’ immediate needs and “have a quick turnaround on what we’re calling 'emergency coronavirus modifications' that need to be put in place quickly,” Williams added.
But the bankers said it is too early to know just how long any downturn would last, meaning they weren’t ready to provide specifics on how a lending relief package might look. They did say, as of Friday, they expect restrictions keeping many businesses closed to abate in the next 60 to 90 days.
Investors see that short-term abatement timeline as motivation to offer rent or mortgage relief.
“I can tell you hotel owners are right now having conversations with their lenders, and many owners are saying, ‘We’re going to default on interest. If you want to foreclose and kick us out and take the asset, it becomes your problem. Go for it,’” CenterSquare Investment Management Chief Investment Strategist Scott Crowe said.
“This is not a normal default. It’s a shock where there’s still hope this is just going to be a deferment of economic activity and not a permanent impairment of economic activity.”
The call for flexibility needs buy-in from all stakeholders. Renters need relief from landlords, who need it from their lenders, who need clearance from federal regulators. That hinges on what kind of stimulus plan is passed in Washington. The FHFA's actions on Monday go a long way toward easing the tension, but landlords have to agree to eviction restrictions before taking the loan forbearance, and the move only covers government-backed loans.
A broader stimulus package was still held up in Senate negotiations Monday night as Democrats and Republicans feuded over who would receive the most aid and how it would be distributed and overseen. Beyond that, lenders will still need to reckon with borrowers who can't pay their debts for months.
“It will still take time to put a longer-term solution in place because you’re not going to make up a quarter of business overnight,” Williams said. “It’s going to take a little time.”