Mature Commercial Loan, Balloon Due, Way Under Water. Help Please

[Stephen Williams]

Hello there, I'll try and make this brief. I am a bit out of my depth here but my father has asked me for help so I'm doing my best. Basically to dumb it down in 2005 my father bought four properties right around the boom before the bust. These mortgages were packaged in one commercial loan in the amount of around 200,000. These aren't great properties and he uses them to pocket the difference of the mortgage payment versus the amount he gets in section 8 for the property every month. He's approaching 70 and pretty much bought his properties in hopes of never really paying them off and refinancing whenever possible to lower the payment and increase income. It's small potatoes but the man's just trying to work less. He also owns 9 other properties with a similar strategy.

So now the trouble. He gets a call today from his lender telling him he had been reviewing the loan and found that he was realistically under water a total of about $40,000 value wise from what the actual loan was. The loan has matured and the only possibility of keeping it is a $20,000 balloon payment that he could never come up with. He asked the man, "So can I just give you the houses?", the man said well we're not really at that point yet, this is more of a notification that it is a bad loan. The houses were mercilessly over-appraised. The bank never reviewed the appraisals and signed off on them. Thus he finds himself in a bad loan, with houses nobody really wants, and a loan that no other bank would want to touch.

The only nest-egg my dad has from all this is about $50,000 in equity from all properties combined. None are purchased under an LLC, they're all personal loans. The man has immaculate credit and has never missed a payment on anything in his life. So all that being said, I hope it makes sense what's going on. My questions are these.

1. Is there any way for him to get out of this predicament without them seizing everything he owns and potentially all of his accrued equity with it (including his own house which is paid off) ?

2. What would be the best starting point and course of action for him to take?

3. Have you or someone you know gone through something like this and what did you/they do?

4. What's going to happen to him from a bank action stand point?

I would really appreciate any advice you have. I'm not a real estate guy; my dad is just my best friend and I'd do anything to help him. Thank you so much for reading.

[Dion DePaoli]

Might need a little more information to get specific but it sounds like dad has an interest only loan on section 8 housing.  We are at maturity and it doesn't sound like he really earned any equity through payments.  So that is a poor loan structure on both the bank and your dad's behalf.  

The good news is the property cash flows so it could support debt service but from the post we don't know how much cash is really available.  I suppose one of the issues dad may have with giving more cash flow to the bank is he loses his desire to own the property if he has no cash from it.  Might just have to suck it up and stick around to make things better or risk the bank going after him for a deficiency judgement.

If dad and the bank can figure out how to pay down the principal that would work best for everyone.  The bank doesn't want the houses I am sure.  Perhaps an extension of the maturity and a forbear of the interest.  So essentially, if the property's income is north of $20k annually, he would need a zero interest setup to pay the principal down for a year.  The key there is the bank would rather get its principal back than write it off.  

It's not clear what the $20k demand really does to the whole picture without real details of numbers and balances, etc.  Did the bank actually offer to refinance with a $20k payment or are we assuming they will refinance if that payment is made?  What would the loan to value be against the property with the $20k payment?  

There is some other ideas that could relate to his additional property and equity but those are probably toward the bottom of the strategy list.  

If you can share some details better like value of the property, gross income, current loan terms that would be helpful in giving you an actual example of a workout strategy.  If not, then run the general idea above at dad and see if he want's to pitch it to the bank.  Chances are the bank is committee reviewing the loan and is exploring some workout strategies on their own.   The down side is they may really want to divest this loan and they are not obligated to create a workout.  The loan is matured and your dad owes the money. Taking the deeds to the properties would probably mean letting your dad off the hook for any deficiency and I am not so sure they would do that, certainly not at this juncture yet.