How margin calls work on a commercial RE loan?
I'd like to learn how investors, banks, debt funds, etc. correlate when it comes to margin calls.
[{"id": "fm6ap5p", "text": "Your question is unclear.\n\nIf you are a debt fund and use a line of credit to originate loans, then a margin call would occur if the property values in your loan portfolio (collateral) dip to certain thresholds.", "replies": [{"id": "fm6by03", "text": "To add to this, all values are theoretical. That\u2019s the biggest argument between debt funds/mortgage REITS and warehouse lenders (banks).", "replies": [{"id": "fm6cbbj", "text": "I would imagine with what\u2019s going on today, plummeting REIT values are giving warehouse lenders the ammo they need to justify their margin calls.\n\nIn the private markets, values move much slower.", "replies": [{"id": "fm6h8r9", "text": "Share price doesn\u2019t have much to do with the value of the assets. They won\u2019t be able to issue new shares at those prices to make up for the margin calls. The share prices are plummeting because mortgage REITS need to post collateral for the margin calls. Mortgage REITS only have limited means to raise capital such as issuing shares, bonds, or calling capital from LPs.", "replies": [{"id": "fm6i5gt", "text": "I\u2019m talking share prices of normal reits, not mortgage reits.\n\nAnd don\u2019t the share prices imply a cap rate to the underlying assets?", "replies": [{"id": "fm7pr7k", "text": "&gt;don\u2019t the share prices imply a cap rate to the underlying assets?  \n\nShare face value isn't closely linked to value of underlying props and or income/expenses.  It should be, but it isn't.", "replies": [], "depth": 6}], "depth": 5}, {"id": "fm7pm5d", "text": "Or, you know, selling assets.", "replies": [{"id": "fm82o10", "text": "Yes but cmbs/mbs aren\u2019t being traded at the moment, which is where a lot of the margin calls are coming from. The non securitized margin calls would mean a vast amount of assets have to get sold, probably at a discount or those that are getting severely marked down are assets like condo inventory, condo construction, malls etc. that people will only scoop at big losses to the lender. It\u2019s such a dynamic time, I\u2019m assuming the warehouse lenders will come up with a unified movement on the margin calling.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "fm9kbj2", "text": "Aren't they just based on a uspap appraisals?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fm6fp0e", "text": "Take some time to learn about how CMBS works if you are interested in a complex and esoteric CRE financing mechanism that is closely connected to tradeable bond markets. \n\nBLUF: The B piece (first loss, highest interest, junk bond) investors in CMBS Trusts control the loan making and servicing for everybody else. In 08 those guys (who are very sophisticated operators in every way) were selling off their B piece junk into CDOs made up completely of B piece segments of various Wall Street CMBS syndications. So their risk was already gone when the RE market collapsed and the CMBX bond market melted down. This time things are different.\n\nThey can't pull that CDO trick anymore and have to hold their B positions and the CMBX spreads are completely blown out and these guys have lost everything. So they are going after the assets to recover their bond losses now. Currently, they are descending upon the hospitality loans and trying to trigger defaults and seize those assets. \n\nRetail is next. I have a retail CMBS loan so I'm very paranoid about these guys. They have tried to DSCR trigger me by double counting insurance premiums to make it look like my OPEX is too high so they can come after my property. This was during normal times and its something these vampires do for shits and grins. Now they've lost it all and they are rampaging. It's fucking terrifying.", "replies": [{"id": "fm6wtsx", "text": "Do you have news articles or any media covering stuff like this?", "replies": [], "depth": 2}, {"id": "fm7m1hq", "text": "To add to that, I work for a Fannie/Freddie lender. So you\u2019ve probably heard about the forbearance plan being offered on Multifamily in the news. Well, on the last call with Freddie they said they would not allow their investors (i.e. B-buyers, Wallstreet) to absorb losses and that they would continue to make the mortgage payments to them while the Borrowers were in forbearance. After the expected flood of forbearances to come thorough over the next couple of months I wonder how sustainable that is? There will have to be another Federal bailout if that\u2019s their game plan.", "replies": [{"id": "fm7oo2q", "text": "They\u2019re probably obligated to contractually, but that still pisses me off. The taxpayers should not bear this risk/ loss.", "replies": [{"id": "fm7vnvt", "text": "Fannie and Freddie have been incredible profit centers for the Treasury for the last 10 years and this is the one instance where taxpayers should bear the loss because they have been receiving all the profits.", "replies": [], "depth": 4}], "depth": 3}, {"id": "fm958gc", "text": "That is not surprising. The Fed buys a lot of Agency MBS these days to keep those spreads manageable. \n\nThe CMBS market has no Agency sponsorship like Fannie/Freddie. These are completely synthetic pass through organizations. I think the SEC \"regulates\" them, but not very much.", "replies": [], "depth": 3}, {"id": "fm9k47c", "text": "They're still in conservatorship, so it's not really a bailout. And that's why you collect the \"G\" in G&amp;S. Those fees are supposed to support the cash flow. Let's be honest, DUS lenders make like 30% ROE on their loss share, so no one is feeling bad for you guys.", "replies": [{"id": "fm9vdy0", "text": "This is why I'm struggling to understand why a company like Arbor is being hammered with all the other mortgage REITS. They have Agency lending income that is simply not going anywhere. Unless I'm missing somewhere that say's they're horribly over-levered, it makes no sense for them to be in the shitter with all the other public NBLs.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "fm9jubx", "text": "How would a calculation made in manifest error result in calling an event of default and foreclosing on you? There are a lot of things that need to happen before that would take place, including lawsuits and court pleadings. You have notice and cure periods to protect you - this seems like a simple battle and not something to be scared about in an of itself.\n\nNow as far as retail property is concerned, are you shut down? Are tenants dark? Do you need lender consent? Does that apply in the face of a government mandate to close? If you have sufficient reserves to carry the Property and pay your debt service, you'll be fine.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fm7q63a", "text": "There are not margin calls on Commercial loans.  There are guarantees and baloon payments which can hurt the borrower.  The lender sells paper (bonds).\nMortgage REITs are in the news losing all of their value because they can't fulfill margin calls.  This is because they leverage every 1$ in capital to buy 5$ of bonds.  The bond prices are falling so the people who are loaning money to the mortgage REITs are making margin calls.", "replies": [], "depth": 1}]