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SHOULD THERE BE ANOTHER RTC?

Last week’s GlobeSt.com Quick Poll asked readers if there should be another Resolution Trust Corp. similar to what was created in the early 1990s. A total of 59% of voters responded that there should be another RTC. Howard Taft, managing director for the Miami office of Cohen Financial, tells GlobeSt.com what he thinks about the creation of a new RTC relating to commercial properties.

“I think it’s a little early to decide if we need another RTC. We’ve probably got to give the market another six months into 2009 to see how refinancings are being handled and what amount of those rollovers are under water.

“In that time, the retailers will know which companies are going to go bankrupt. We’ll also see what will happen with tightened underwriting criteria for lenders, with raised cap rates, high TI and leasing rollover requirements with approximately 65% loan to value. Billions of dollars in loans that are coming due in 2009 could be under water, and I think that’s going to be the next acid test as to who needs to be bailed out.

“On loans that have three to four years until maturity, where LTVs may have gone down or debt service coverage reduced, I don’t see lenders exercising paydowns or modifications. The true test will be with the principals that borrowed at 80% during the initial term, some interest-only. Now, when they’re refinancing with stringent underwriting, it’s producing a lower loan amount than is currently owed. That fallout will precipitate to Washington, which will have to come in and provide financing with those portfolio lenders that hold these loans that they thought were in good standing.

“The crisis of 2009 is with the securitized loans that have no vehicle to fund new money. The securitized loans that were created seven to 10 years ago that are coming due this year, will have to be paid off or go into hyperamortization. Some of the securitized loans had hyperamortization clauses that stated if the loans come due and the borrower can’t pay it off, then the interest rate would increase and the amortization would be shortened so the borrower could remain in good standing for the term of the loan.

“Another vehicle is being created with mezzanine lenders that will fund the difference between the lower payoff loan and the estoppel balance. Those lenders will be charging high interest rates, some fees and will also own a slice of the deal. I don’t think another RTC will be necessary because those mezzanine funds are being created to make up for the shortfalls in loan payoff proceeds.

“The owners who have an existing loan higher than they can refinance, even with a mezzanine lender, will have their loan foreclosed by the master servicer. These loans were are all sold to bond holders and do not need an agency to come in to fund them. Bond holders don’t need to be bailed out.”

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