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Los Angeles Business Journal: Mortgage Market on High Alert

March 30, 2020

By James Cutchin

Ahead of passage of the federal government’s coronavirus rescue package last week, uncertainty roiled the commercial mortgage market and prompted at least one executive to warn of grim prospects.

Thomas Barrack, founder and chief executive of downtown-based real estate investment firm Colony Capital Inc., expressed concerns in a blog post that the pandemic could cause business closures and evaporating cash flows. That, he said, could result in a wave of borrower defaults.

The coronavirus lockdown is devastating large swaths of the economy. With bars, dine-in restaurants, nonessential brick-and-mortar retail businesses, and entertainment venues closed, many workers have been left without cash to pay bills.

More than 1 million Californians applied for unemployment benefits in less than two weeks amid virus-driven layoffs and cutbacks. In the hotel industry alone, more than 125,000 workers in the state have already lost their jobs, according to the American Hotel and Lodging Association. Many of these workers will struggle to pay their rent on April 1.

Richard Green, director of the USC Lusk Center for Real Estate, appreciates the potential magnitude of the situation. “There is a whole lot of real estate that isn’t making any money at all right now,” he said, “particularly in hotel and retail.”

“Property owners are not collecting rent, so they don’t have money to pay mortgages,” Green added. “If you are a lender, you are suddenly having a lot of loans that are going into default.”

Green said forbearance, or postponement of rent and mortgage payments, could help prevent a chain-reaction of defaults —but only if every party up the financing chain commits.

“If the property owner is going to forbear, the lender will also need to forbear,” he said. “But then the lender also owes money and needs to pay back the loans.”

The Federal Reserve has already begun stepping in to support that crucial final link in the chain.

On March 24, the Fed asked Blackrock Inc., the world’s largest investment manager by assets under management, to execute tens of billions of dollars of bond purchases on its behalf. These will include commercial mortgage-backed securities secured by multifamily-home mortgages, injecting cash into the market.

Green said this quick government response is critical.

“The key is the Fed doing its job well and getting money in people’s hands,” he said. “If we do that, once the disease is done, we’ll snap back rather quickly.”

The original article can be found here.