September 26, 2011

Charlie Brake: Lenders May Prefer Selling Notes to Foreclosing

By Sharon Poland, director of business development

When Michael Bull, host of the popular “Commercial Real Estate Radio Show,” needed expert insight on the various legal issues facing commercial real estate, he called Hartman Simons’ Charlie Brake.

CRE Show Brake’s appearance on Bull’s show aired Saturday in Atlanta on Biz 1190 at 10 a.m. EST and on Sunday on Talk 920 at 9 a.m. EST. The show is available for download here. Sonny G. Morris of Morris, Manning & Martin and John F. Isbell of Thompson Hine also were guests on the show.

During his appearance, Brake noted that when faced with non-performing loans, lenders often prefer to sell the note rather than go through the foreclosure process for a variety of practical and financial reasons.

Selling a note often is a quicker process than foreclosure for a lender, and it also enables a lender to avoid paying insurance and real estate taxes on a foreclosed property, he said. Furthermore, “by selling the notes, [the lenders] don’t get in the chain of title, so they don’t have to worry about any environmental issues or any other sort of issues that might arise from being in the chain of title.”

Finally, “I’ve had some lenders that I work with feel that they actually get a better price by selling the note … because they feel like once they foreclose and take it back, the property is tainted,” he added.

When selling the non-performing notes, lenders should make minimum representations and warranties, Brake said.

Brake noted that his clients who have purchased non-performing loans typically want to eventually own the property themselves. “What they like to do is go take the temperature of the borrower and ideally would like to negotiate a deed-in-lieu agreement so that when they close on the loan, they turn right around and simultaneously close on the deed in lieu,” he said.

Brake also stressed the crucial role that attorneys can play for investors buying notes. “They’re not used to living in the world of lenders,” he noted. “This is where their attorney can be a very, very valuable asset to them because they need to understand – in the different jurisdictions – what the process is, how long it might take and what some of the risks are. They differ in each state.”

Later in the show, Bull and his guests examined loan workouts. As for the pre-negotiation letters that are part of the process, borrowers shouldn’t worry too much over clauses that require them to agree not to file bankruptcy, Brake said. “I really don’t think [such a clause is] enforceable.”

Borrowers likely will have to agree to release the lender from liability, Brake added. Generally, though, “I don’t see the pre-negotiation letters [as] having the borrowers sign away all their rights,” he said. “The ones I’ve seen have been pretty fair, pretty balanced.”

Short sales and bankruptcies are two other topics discussed in the show.


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