Bankruptcy attorneys concerned about whether loan deferments will help landlord clients

While many landlords concerned about making mortgage payments are receiving continuances or working out other alternative payment structures with their banks, California bankruptcy attorneys worry whether the terms that will go into effect after the deferments end will keep borrowers whole.

"There's no control over what the banks can and can't do. California can't tell the banks what actions to take. However, they have attained cooperation from the banks thus far, a 90-day relief from mortgage payments if you can show you were impacted by Covid," said Scott Gizer of Early Sullivan Wright Gizer & McRae LLP.

Gizer and many of his colleagues were concerned over how deferred payments would be handled after the 90-day grace period.

"Will we see a balloon payment at the end of the period?" Gizer wondered. "Other lenders are allowing the three [delayed] payments to be tacked onto the end of the loan. That seems like a good solution."

If banks do not extend some comparable long-term relief, another real estate and mortgage crash is a near certainty, Gizer said. "The blowback will be enough that they will need to take some action to defer that payment over a period of time. If they don't there are going to be a slew of defaults and an overflow of REO [real estate owned] properties."

David Piotrowski, a Los Angeles sole practitioner who represents landlords, said some clients had asked about their options following a mass nonpayment of April rent.

Piotrowski described those affected as "the very small landlords, for example somebody who owns one property or has a mortgage on an extra house they are renting out."

Adam Salis, a Mission Viejo sole practitioner, said there's been a variety of approaches to accommodate landlords unable to service their loans. "Lenders recognize if they don't do something to accommodate, there will be an avalanche of bad loans to deal with," Salis said.

Mostly he's seen temporary mortgage deferment for the first few months with an agreement to capitalize those deferred payments by adding them to the principal balance.

The "separate but interlocking relationship," between tenant and landlord and landlord and financier had been improved by government intervention in the process so far, Salis said. The ongoing stability of those relationships, Salis said, would largely depend on how successful those programs prove to be in coming months.

Adam Salis

"These programs will allow landlords to be paid at least a portion of the rent. I think the government intervention has really kept people whole. I'm cautiously bullish on the longterm prospects for at least commercial landlords," Salis said.

Sean Andrade of Andrade Gonzalez LLP in Los Angeles said landlords banking with major financiers other than Citigroup, JP Morgan, US Bank and Wells Fargo, were in an even tighter position as they were not party to an agreement made with Gov. Gavin Newsom, in which he secured deferment for borrowers from those banks.

"I think folks need to be prepared that you can't get your payments moved forever," Andrade said. "They can't do foreclosures or evictions currently, but from a legal standpoint that day is fast approaching. When the period is over and you have to pay this huge sum, that doesn't really help people."

Even for those borrowing from banks that are party to the agreement with Newsom, who have been promised no negative credit impact, no evictions for 60 days, and a workable payment structure after the pandemic abates, there's no guarantee any of these handshake agreements will be honored, Andrade said.

In the meantime Andrade said he's heard from clients borrowing from other banks that they will need to pay lump sums at the end of the forbearance period. Further uncertainty around what relief could be expected from insurance coverage complicated the issue, he said.

Even those kept whole by the end of the deferment process could face borrowing issues in the future, Andrade said, "Is a bank going to look at three recent non-payments and still give you money?"

These concerns were echoed by Ronald Richards, a sole practitioner in Beverly Hills who handles bankruptcy issues. While many of his clients were receiving deferments of some kind, he said such actions would only postpone economic disaster.

"There's no guarantee their auto bots won't report you to the credit bureaus," Richards said, referencing to automatic online tools many banks employ to liaise directly with companies that create credit scores.

Deferring payments now might stay an imminent economic ruin but it would likely spoil longterm relationships with creditors, Richards said. "You're going to be a bad bet in the future. This is a poor strategy if you want to maintain your relationship with a bank."

While most attorneys contacted for this story said their landlord clients had received some form of relief, some attorneys say smaller landlords are planning or already in the process of defaulting on their mortgages.