Following last week’s review of increasing loan modifications in retail and lodging, this week we examine the actual types of modifications reported for these two struggling sectors. For lodging loans, where modifications are most prevalent (approximately 9% of UPB versus 4% for retail), forbearance is agreed upon at the highest rate. With 86% of all modifications for this property type falling into the categories of forbearance or “other,” the ability of lodging tenants to call upon liquid assets, such as cash reserves, continues to be significant. In contrast, retail operates with fewer reserves and generally less liquidity. Combining this with a greater proportion of retail loans nearing maturity, it is logical that modifications for this property type are most often found to be maturity date changes or combinations, which include amortization and rate changes.
As the fallout from the pandemic continues to evolve, and stakeholders get a better grip on the structural changes in the economy, we expect loan modifications to vary greatly by sector. We continue to closely monitor these variations, along with the incidence of modifications across all sectors, as a good indicator of capital market sentiment.