I have been telling you guys for years to subscribe to the FinFacts Newsletter from George Smith Partners. The forerunner of this wonderful commercial mortgage banking company was ancient before I even started my own ancient commercial mortgage company forty years ago.
You will recall that a mortgage banker is a mortgage company that retains the loan servicing rights. If you want to be wealthy in the mortgage business, you need to retain the servicing.
"But George, I need cash now." Live more frugally, man! Keep your overhead down, so you don't have to sell off your precious loan servicing rights.
Why is loan servicing income so vitally important?
Every ten to fourteen years real estate suffers a major crash. It normally crashes by exactly 45.000%. Those of you who are math or engineering majors will chuckle at my silly insignificant digits, but the truth is that commercial real estate estate fell by almost exactly 45% during the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.
The next crash, almost surely to be known as something like the Coronavirus Crash, is now past due. It has been twelve years since the 2008 crash.
Want to know why everyone thinks that I am this big brain? The only reason is because my company didn't crash-and-burn during these three horrible crises. Why didn't Blackburne & Sons crash-and-burn, like all of our hard money competitors, during these 45% commercial real estate meltdowns?
The answers is that my family lived frugally, and the company focussed, not on making a quick profit, but rather on building long-term loan servicing rights. When the inevitable real estate crashes occurred, we were able to tighten out belts and live off of our loan servicing fees.
I sell a course on becoming a hard money broker and developing long-term loan servicing rights. I am only half-joking when I urge you to mug some nun, if necessary, to buy this super-important course. Let me be brutally honest. If you are not working towards building a loan servicing portfolio, get the heck out of of the commercial loan business. If the Coronavirus Crash doesn't get you, the next one will.
Okay, so what have the super-experienced folks at George Smith Partners taught us this week? David Pascale, their Senior Vice President, wrote this week:
Spotlight on Hotels:
The hotel sector has been hardest hit by the pandemic. Recent weeks have seen permanent closures of high-profile hotels such as, The Luxe on Rodeo Drive in Beverly Hills and the “Crossroads of the World” Hilton on Times Square. Experts indicate that without significant aid from Congress the wave of closures is just beginning.
CMBS has been the preferred loan execution for hotels for many years with $85 billion in outstanding hotel loans. Statistics from Trepp, the leading CMBS analytics group, indicate unprecedented stress on the sector.
Loan delinquency are at 23.4%, highest on record (December 2019 it was 1.3%). The volume of delinquent loans exceeds the highest level reached during the Great Recession by 53%.
Over 35% of CMBS loans are on servicer “watchlist”, with 24% in special servicing now. The hardest hit MSA’s are New York/Newark, Houston, Chicago, Dallas, LA, and Atlanta. All these metros were major convention and business travel hubs.
There are some bright spots in the industry, as many desirable drive-to destinations are experiencing high occupancy. Travelers are getting comfortable with procedures such as contactless entry, intense cleaning procedures, etc.
It is apparent that a return to “normal” levels of air travel and business meetings will be dependent on the widespread distribution of an effective vaccine. This is estimated to occur in mid-2021, at best, so Congress must act, or the industry will see waves of foreclosures over the next several months.