Loan Modification Basics

Posted on Jan 29, 2024 by Scott MacPherson

The Mortgage Bankers Association estimates that nearly $1 trillion in multifamily CRE debt will mature by 2027.  An historically large number of multifamily debt maturities is on the horizon, leading many borrowers seeking to extend time on their current loans waiting for better interest rates and loan terms,  rather than refinancing their property at a high interest rates or selling it at a loss. Over the last few months I’ve been increasingly asked by lenders and borrowers to write up or review such loan modifications for the purpose of keeping current debt where it is, and thought I’d go over the basics with you.

A number of loan terms can be altered through a loan modification including, but not limited to, the loan balance, interest rate, date of payments/deferral, reserve and escrow amounts, providing access to reserve/escrow funds to borrower, and extending the maturity date of the loan.

The adjustment of these terms affects the loan agreement, promissory note, and the deed of trust. However, all changes may be made through one loan modifying document, the loan modification. The modification also doesn’t need to be recorded, although this is up to your lender. Changing the loan terms through one, unrecorded document simplifies the updating process, and avoids costs like origination fees and prepayment penalties or premiums which would likely be required under a refinance. Although there may not be recording or origination fees, a borrower will likely have to pay the lender’s attorneys’ fees for their work on the modification. The lender may tack this amount onto the principal of your loan or may expect it at the time of the modification.

Despite the whole process sounding fairly simple, the lender will have a number of considerations before approving your loan modification. One issue is whether the modification will in any way affect the structure of the borrower or the control of borrower. The lender will not want the currently controlling entities or individuals of the borrower to change, taking control away from a guarantor who will be on the hook if the borrower defaults. The lender will also want to reevaluate the financial condition of these parties to confirm that they are still in a position to pay back the loan if things go south.

The lender will also want to ensure that the modification does not negatively impact the performance of the property, reducing the revenue of the property used to pay back the loan or causing any loss in value of the collateral. A loss in revenue or value both create greater risk for the lender in the event of a default, since the lender won’t have adequate collateral to repay the debt. For the same reason, the lender will send out an inspector, prior to the modification’s execution, to review the property for any needed repairs or capital improvements, and to ensure the property is in compliance with the current loan.

A loan modification can be a useful tool for those seeking updated terms or an alternative to refinance. If you’re interested in modifying a current loan and have any questions, please feel free to reach out to discuss the process; what to expect; and how we can help.