By: Michael Powers
Over the past seven years, the residential mortgage crisis here in America has been widely publicized. When the mortgage market crashed in late 2007, The Federal government responded with the Making Home Affordable programs and service providers of all shapes and sizes popped up by the thousands. For the most part, displaced mortgage professionals and ambitious legal professionals were quick to answer the call and offer loan modification and other services designed to help struggling homeowners. In response, legislators and regulators acted to protect consumers by adopting measures which served to define which professionals could offer services and the rules governing their conduct. Ultimately, The Federal Trade Commission (FTC) passed the MARS rules, which effectively limited the industry’s participants to attorneys and legal professionals and provided ground rules regarding their business conduct.
Conversely, the commercial mortgage loan industry was given little attention across the board. Far fewer law firms and loan modification companies offered services for troubled commercial property owners, and regulators gave little attention to the commercial segment of the mortgage industry.
The problem was that the commercial mortgage crisis took longer to develop than the residential mortgage crisis, and was not plagued by the widespread mortgage fraud seen in residential mortgages. However, as the economy fell into recession, the unemployment rate soared and American consumers simply had less money to spend. For landlords of rental properties, this meant more frequent delinquency, vacancy and transition. As small businesses began to experience decreased income and often fail all together, owners of shopping centers, strip malls and office buildings saw their delinquency and vacancy rates begin to rise as well. In time, the ripple effect of America’s economic woes resulted in many commercial property owners realizing a negative cash flow position which would consume their cash reserves and jeopardize their ability to maintain the payments on their commercial mortgages.
So, like anyone struggling with a mortgage, those commercial property owners began to look for help. Unfortunately, most found that securing trustworthy commercial mortgage assistance was not going to be easy. First and foremost, the laws governing commercial mortgages are different than those governing residential mortgages, so many of the attorneys offering residential mortgage assistance are unfamiliar with the applicable laws. Residential mortgages are governed in great part by the Real Estate Settlement Procedures Act (RESPA), while commercial mortgages are governed by the Uniform Commercial Code (UCC). In addition, commercial loans are structured much differently than residential loans, and performing workouts requires completely different information and calculations.
Because of these facts, the majority of service providers available to commercial property owners today are “loan modification” companies. Unfortunately, loan modification companies offering services for commercial mortgages are not held to the same ethical standards of attorneys, and not regulated by the FTC and their MARS rules. This means that employing them is risky and requires a real leap of faith. In addition, commercial loan modification companies do not have the ability to deploy the legal tactics that an attorney can when appropriate. In some commercial loan cases, there are legal issues with the loan itself that only a licensed attorney can properly address.