Experience, Experience, Experience
Where have all the experienced people gone?
As the credit crisis deepens and gathers steam, it is becoming clear that the "problem" simply is not limited to "big picture" subjects favored by economists and industry wags.
Recently, we encountered several situations highlighting the inexperience of the title company and local counsel. In other words, problems arose during the execution of the recovery plan simply because key players in the plan were not "in" this sector of the commercial mortgage industry during the last real estate downturn. Below is a short description of both situations, with a couple of practical suggestions.
Separately, outside of a few large commercial mortgage service companies and the largest national banks, many banks and servicing companies are thinly staffed with personnel who are experienced in commercial real estate workouts, foreclosures, bankruptcies and related litigation (i.e., special servicing). Consequently, we devote a considerable amount of effort in training less experienced bank and loan servicing staff – both formally in seminars and informally in conversations. (In future postings, we'll cover a broad range of training and mentoring topics.)
It's the Experience:
Here are two recent situations where the inexperience of a key team member jumped out of the weeds:
- Large bank has a large revolving line of credit to a large, "production" home builder (i.e., a builder that builds entry-level [and move-up level] tract homes). Unable to negotiate a deed-in-lieu transaction for the portfolio, the bank starts a non-judicial foreclosure, where it will take title in a wholly-owned (special purpose) entity. The title company tells us that the bank must take the foreclosure trustee's deed in the name of the bank – and not in the name of the wholly-owned entity. After talking with four (4) different title company employees (as I went "up" the chain of command), I finally was able to talk to someone who "had been there" and quickly (in less than 30 seconds) agreed with our plan. We wasted several weeks.
- Large bank hired local counsel to handle mechanics' lien claims as numerous construction loans went from performing loans, to the watch list, and finally to the non-performing list. The same local counsel was retained to handle the foreclosure. As the foreclosure process progressed, we questioned local counsel's advice that the guarantors had no liability (as guarantors) under the loan. After bringing the question to more experienced lawyers at the local law firm, they confirmed that the guarantor was a "true guarantor," and had liability under the loan. This was an important piece of information.
Suggestion: once you understand (or experience) this problem, then several solutions become obvious:
- Establish relationships with experienced title companies, appraisers, property managers and local legal counsel. These service providers should be required to literally "list" their experience in this type of market.
- Confirm "who" at each service provider has "real" experience; and that the experienced personnel will be involved in the process.
- Ask these service providers to help train your staff.
No doubt, the "good times lender" places a premium on "location, location, location" as it underwrites the real estate. However, in the "tough time for lenders" market, the focus turns to "experience, experience, experience."
Please post any similar experiences, or suggestions.
