Business | Banking
Borrowers find themselves on receiving end of new concepts
Real estate developer John Wimmer paid Citigroup Global Markets Realty almost $1 million last year to lock in a 5.6 per cent mortgage rate on the refinancing of six commercial properties.
- Bloomberg
- Published: 00:01 March 16, 2008
New York: Real estate developer John Wimmer paid Citigroup Global Markets Realty almost $1 million last year to lock in a 5.6 per cent mortgage rate on the refinancing of six commercial properties.
At the November closings, Citigroup, citing plummeting demand for mortgage bonds, boosted the rate to 7.123 per cent.
"I was very upset," Wimmer said in a phone interview from his office in Hales Corners, Wisconsin. "We had many proposals to lock the rate with other financial institutions and we picked Citigroup because of their reputation and strength."
Wimmer sued. So did a developer in Kentucky after Prudential Mortgage Capital invoked the "material adverse change" clause in their loan agreement to raise his rate.
Banks have used the clause after calamities such as the terrorist attacks of September 11, 2001, to free themselves from lending obligations.
Uncertain agreements
With the spreads between commercial mortgage- backed securities and 10-year US treasuries at their widest in at least 12 years, banks are applying the concept to avoid lending at money-losing rates, scuttling deals, leaving borrowers at risk and casting doubt on contracts that have already been negotiated.
"We are in an extremely uncertain time and no one should feel sanguine about any agreements that are on the table," said Scott A. Singer, executive vice-president of Singer & Bassuk Organisation in New York, which arranges real estate financing.
"Lenders with the best intentions find the game changing on them. This is a time to put your head down and execute business as quickly and efficiently as you can."
Commercial mortgage lenders had not used the material adverse change clause, or MAC, to back out of commitments since the September 11 attacks.
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