Watching the Commercial Market: Turning Defaults into Financial Gains

Tara Mastroeni
Published: May 11, 2017 | Updated: December 10, 2021

Lenders and mortgage note buyers are about to see a unique financial opportunity, as a large defaulting debt wave hits the market. This may feel like a news story from the early 2000’s, but with one key difference. We are not looking at the residential housing market, we are speaking about the commercial realm.

In 2008, the housing market went into its famous free fall, and mortgage notes flooded the market as banks scrambled to recoup losses and stay afloat. It looks as though something similar may be coming in the commercial property market.

Bloomberg reported earlier this year about a wave of commercial property debt that is currently looming. The wave is valued at about $90 billion, all leftover debt from 2007, just before the crash.

Much of this debt is likely to default, thanks to commercial growth that hasn’t kept pace with the explosive growth the residential market has seen. If that happens, it will not spell the same disastrous crash that occurred in 2008, although it could be good news for private mortgage note buyers.

What To Watch For As A Mortgage Note Buyer

Watching the commercial markets here is absolutely crucial.

The commercial market is struggling, especially on retail properties. With e-commerce quickly replacing brick-and-mortar storefronts, banks and other lenders are wary of refinancing if owners of retail properties are unable to make their payments.

This is especially true of large-scale properties like shopping malls, which are being hit hard as the internet siphons away at their client base. Even in higher-income cities, about half the mortgages may have trouble refinancing, with experts estimating a default rate of around 13%.

Banks are unlikely to be as ready to refinance loans as they were in the 2000’s. Loan regulations are steeper and lenders are wary of taking on as many risky refinancing deals as they were a decade ago. However, because of this, it is likely they will be more than happy to cut losses and get rid of notes by selling real estate notes off to private mortgage buyers.

While this is unlikely to trigger a massive economic recession, mortgage buyers should be paying close attention for the moment when these notes begin to flood the secondary loan market.

What to Consider if You Hold a Commercial Mortgage Note

If you are the owner of a commercial mortgage note, now may be a good time to consider whether selling to a mortgage note buyer may be in your best interest.

Refinancing is risky, with commercial properties not retaining their value or appreciating the way we have seen in the housing market. A mortgage note buyer can make you a cash offer for your note, helping you formulate a profitable exit strategy.

This kind of arrangement helps you avoid the pitfalls of an unfavorable market, while still having a chance to make a profit on the note, and established note buyers are experienced in reading the market and getting you the best value for your note, even if it is not performing as well as you would prefer.

Keep in mind, a mortgage note buyer buys debt, not property. So to sell a mortgage note, you must own the debt, rather than owe the debt. If this sounds like you, getting a quote on your mortgage note is a simple process. A few answers about the note and property, and an experienced mortgage buying specialist can be at work formulating a quote and a strategic exit plan.

What Private Mortgage Buyers are Considering

As these notes begin to saturate the market, mortgage note buyers have their pick of notes to buy, and will be able to be selective of what they buy and what they leave on the table, so to speak.

The kinds of loans, location of the property, and the sorts of records kept by the seller are all important in a note buyers decision making. Obviously this isn’t the extent of the decision making process, but it’s important to understand that soon the mortgage note buying industry will be very much a buyers game in terms of of commercial mortgage notes.

This does not mean that it isn’t worth trying to sell your mortgage note. Quite the contrary. Trying to sell your note prior to the flood of notes hitting the market will give you a better chance of a good offer and keeps more of the negotiating power in your hands as you shop around for the ideal buyer for your note.

You want to always make sure that you are working with a reputable company, with many years of knowledge and experience in the mortgage buying industry. This ensures that you are getting the very best deal for your note.

The Final Takeaway

When it comes to this $90 billion debt wave, there is no need for panic in the big picture of the global economy. There is, however, a great deal of consideration to be done as mortgage buyers and sellers watch the markets and decide when to throw their chips in.

A few key takeaways:

  • This coming defaulting debt wave is from the commercial, not the residential market, meaning no global recession, but heavy financial gains to be made
  • The commercial market has not recovered as quickly as the financial market, leaving many commercial properties at high risk of default.
  • Banks are unlikely to be willing to refinance troublesome loans.
  • Mortgage holders should be looking to private note buyers for lucrative exit strategies to avoid floundering in the market.
  • Mortgage note buyers should keep an eye on the commercial markets, as lenders begin to put notes up for sale.

Moments like this don’t come around often, and the opportunities presented when much of this commercial debt defaults could mean huge financial gains for many mortgage note buyers and sellers, if they are smart with their investing dollars and timing.