Like many small businesses across the country, hotel owners are faced with difficult choices as the impact of COVID-19 ravages the economy. Unemployment shot up to its highest point in decades as governments effectively shut down nonessential businesses. But while layoffs and furloughs are grabbing the headlines, a silent job killer with long-term implications for the hospitality sector and the broader economy looms, and Congress and the Trump administration must act.
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Books and movies like “The Big Short” and “Too Big to Fail” about the 2008 financial crisis familiarized millions of people with the concept of mortgage-backed securities. Residential mortgages were sliced up and packed into tranches and sold off as securities. It seemed foolproof, right? Who wouldn’t pay the mortgage on their house? Well, we all know how that ended. The toxic assets bundled into mortgage-backed securities brought our entire financial system to the precipice. Only our federal government’s intervention kept the entire thing from crashing down. Remember this last part because it is key to resolving the looming crisis facing the hotel industry.
Hotel owners face a similar crisis today but through no fault of their own. The precipitous drop of occupancy rates and revenues because of COVID-19 left many hotel owners struggling to meet payroll and pay their mortgages. While the Paycheck Protection Program offers some relief on the employee side of things, it does virtually nothing to help small-business owners pay commercial mortgages. Fortunately, many hotel owners with traditional loans are working with their lenders directly to seek forbearance or otherwise negotiate terms. However, owners trying to stay current on or renegotiate commercial mortgage-backed security loans face a series of obstacles that could not only end up killing their businesses but also upend the fixed income market. A series of CMBS loan defaults would create a significant market disruption that could negatively impact pension plans and other consumer-facing investment vehicles.
When a borrower secures a CMBS loan, the loan originator packages the assets with other loans and sells them off in tranches to bond buyers. A master servicer handles the minutia such as directing payments, taking in reporting obligations, etc. Ideally, a borrower makes its payments regularly and does not have to even speak with the master servicer. Here is where it gets tricky for the borrower—a master servicer cannot negotiate or take any sort of accommodating action on a CMBS loan. The only recourse is to transfer the loan to a special servicer, a path traditionally taken when a borrower is in default. The process to get to this stage is incredibly bureaucratic and time consuming. It can take weeks—and that’s just to start a conversation about forbearance. Many hotel owners with CMBS loans cannot afford to wait—they risk imminent default.
The implications of mass defaults and foreclosures in the hotel industry would have profound effects on our industry and the economy. Hotel and lodging assets back more than $300 billion worth of CMBS debt. Lenders are not equipped, nor do they desire to take ownership of and operate distressed properties. It is imperative that these assets remain in good standing, but because hoteliers have limited options to work directly with holders and servicers of CMBS debt, they cannot seek meaningful and timely relief during this crisis. This is where government action is needed.
It is imperative that the $300 billion in assets remain in good standing. Hotel owners are doing what they can to remain current on their loans, but the lockdowns to prevent the spread of COVID-19 mean their businesses generate little to no revenue. Many are concerned that economic recovery will not come soon enough to stave off default. The Federal Reserve and the Department of the Treasury must extend the Term Asset-Backed Securities Loan Facility to cover CMBS. They must inject liquidity into the non-agency CMBS to maintain a functional marketplace and provide capital to the holders of these securities. They also need to guarantee these non-agency CMBS assets to provide security to CMBS investors, which would give servicers the much-needed ability to provide relief to borrowers. Servicers will need guidance to ensure they have maximum flexibility to work with hotel owner borrowers constructively to prevent defaults. The Treasury and the Federal Reserve must lead the way while the Securities and Exchange Commission removes regulatory hurdles.
If the government does not act to provide immediate liquidity to owners facing default on CMBS loans, thousands of small-business owners will lose their properties. Countless hospitality workers will have to look elsewhere to pursue their careers and their livelihoods. The CBMS marketplace could potentially melt down as these securities implode. But it does not have to be this way.
The hotel industry is a signal industry and felt the effects of this crisis at its onset. It will also likely be one of the last to recover as a cautious public slowly ventures out to travel again and businesses begin scheduling meetings and conventions. Yet for an economic recovery to take place, there must be jobs for workers to come back to, and that is why we need our leaders in Washington to act. Even though the starting line may be months away, they can ensure that our vital industry remains on the road to recovery.
Cecil Staton is president/CEO of AAHOA.