December 17, 2007

When Your Commercial Mortgage Loan Gets Retraded

Retrading Usually Means Your Commercial Mortgage Loan Rate Will Be Increased

When you apply for a commercial mortgage loan from a CMBS (conduit) lender, the lender will usually quote your interest rate at the time of application based on a certain spread over 10-year Treasuries. For example, you might be quoted 225 basis points over 10-year Treasuries. Ten-year Treasuries today are are around 4.25%. If your deal was closing today, the interest rate would be 2.25% (225 bps) plus 4.25% or an interest rate of 6.5%.

Because of the credit crunch, however, many conduit commercial lenders are not honoring their quotes from months earlier. The market for mortgage-backed securities is in turmoil. The demand for commercial mortgage-backed securities has fallen precipitously. Conduit lenders can no longer sell commercial mortgages at the same prices they were quoting five monhs ago.

Therefore many commercial mortgage borrowers are finding that their loans are getting retraded. Retrading means that the investment department of the conduit lender takes another look at the loan, in light of current market conditions, and then increases your interest and lowers your proposed loan amount. In the example above, the borrower's interest rate might get retraded (increased) to 275 basis points (2.75%) over 10-year Treasuries, which would equal 7.0% today.

At that point, the disappointed borrower can simply walk away from the deal, along with a partial refund of his application fee. The problem is that by then the borrower will already have paid for his appraisal fee and his toxic report fee, by far the largest of the expenses.

If the borrower were to start all over with a new conduit lender, however, he would probably not be able to find a better deal elsewhere. Most CMBS lenders sell to the same market for bonds, so a new lender will probably not be able to offer him a better deal. All he will accomplish will be to delay his closing and risk getting retraded again.

As a practical matter, most borrowers end up accepting the retraded (inferior) terms.

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