Navigating and surviving the mortgage crisis

Negotiating a solution is almost always the best outcome for the lender and borrower.

Commercial real estate professionals may have another hurdle to clear in this difficult market. Recent developments in the residential mortgage crisis concerning issues with banks’ documentation – such as deficient recordkeeping, forged signatures, falsified records, and insufficient inspection of mortgage documents – may also impact the commercial marketplace involving office, industrial, retail and
multifamily properties.

At heightened risk are properties that served as collateral for loans that were assigned, sometimes on multiple occasions, as part of larger loan portfolios prior to the time a foreclosure action was initiated. Anyone who has bought or sold, or plans to buy or sell, foreclosed commercial property could be impacted. Litigation that may result from these circumstances includes disputes between or among
banks, borrowers, servicers, buyers, sellers, title companies, and bond investors.

How can you determine if you might be affected? It’s best to hire a lawyer experienced in foreclosures and real property law to review your particular situation and to provide professional counsel.  If you have purchased a foreclosed property, one purpose of the review is to help you determine whether you should file an action to quiet title, which seeks to affirm you are the owner of the real
property. If you are a subsequent buyer of the property post-foreclosure, then you should also review title insurance policies as a possible source of recovery.

If you currently own commercial property that is subject to a mortgage and you, for example, expect to be unable to make an upcoming balloon payment, the purpose of the review will be to identify potential negotiation points to support your discussions with the bank or, in the worst case scenario, to defend yourself in litigation.

In such circumstances, owners/borrowers should expect their counsel to follow a few key steps (though the course of action will vary depending on your situation):

Negotiate with the bank

Many lenders are interested in negotiating a solution for commercial loans that are either in default or about to go into default, given that a performing loan is more valuable to the bank than a non-performing loan.

Although it is typically applied in a negative context, the phrase “extend and pretend” appears to be truly applicable to many commercial lenders that are trying to postpone and hopefully avoid or at least minimize the negative consequences of troubled loans. Owners/borrowers can sometimes use this mindset to achieve a win-win.

If necessary, litigate

Not every situation can be resolved pre-litigation. In such instances, the owner/borrower will need to move from the review and negotiation phase into litigation. In most jurisdictions, defenses to a foreclosure action include fact-intensive equitable defenses such as unclean hands, estoppel and waiver, in addition to contract or legal defenses based upon, among other things, the failure by the bank to prove it owns and holds the underlying loan documents.

And, as the old saying goes, the best defense is a good offense. In litigation, this means finding a legitimate basis for a counterclaim against the lender. Hiring competent legal counsel is important, given that commercial foreclosure actions are not cookie-cutter disputes.

Be patient

Negotiating a solution is almost always the best outcome for the lender and borrower, from the perspectives of both lost time and money spent. Lenders and borrowers should expect foreclosure lawsuits to last months if not years, and to cost tens of thousands, and sometimes hundreds of thousands, of dollars in litigation expenses alone.

The stabilization and recovery of the commercial real estate market could be delayed an additional two to three years, if not longer, by the current foreclosure challenges facing borrowers, lenders, buyers and sellers. Profitably participating in this marketplace requires patience, attention, and a willingness to take calculated risks associated with the foreclosure crisis and its effects on both individual transactions and the overall industry.

Published on Florida Real Estate Journal (