REO Properties Rate Triples in the 2nd Quarter

Distressed property foreclosures in New Jersey jumped to a record level from April to June this year. The rate of REO properties almost tripled during the period as loan servicers and lenders go into court to file foreclosures on 413 income-producing commercial properties.

According to records released by the New Jersey judiciary, almost 50 percent of REO properties in the second quarter were posted in June.

Industry experts pointed out that the rising number of commercial property foreclosures is another indication of how the economic downturn is severely affecting the commercial real estate, a market that includes shopping centers, office buildings, apartments and industrial sites.

And just like in residential real estate market, commercial property mortgage borrowers who are facing drastic drops in rental income or revenues have stopped making payments. This prompted loan servicers and lenders to ask courts to turn the ownership of properties to them.

An example of the current commercial property foreclosure crisis is Linens ‘n Things Inc.’s former headquarters in Clifton. The retailer rented the building from Daibes Enterprises. According to the repossession complaint filed in court, when the retailer stopped paying the rent early this year, Daibes also ceased making payments on its almost $15.2 million mortgage.

Daibes Chairman and developer Fred Daibes said that his company will lose the equity it has placed on the property but it has no plan to contest the foreclosure.

Nationwide, market data showed that over $31 billion commercial properties are on the brink of becoming REO properties. In New Jersey alone, 73 commercial properties are considered distressed, with a combined value of $3.3 billion. Included in the listing is the office building of Morristown Plaza valued at $18.8 million last year.

Meanwhile, Herrick, Feinstein law firm partner Gary Eisenberg said that the commercial foreclosure rate does not show the real extent of the problem because banks have been making some stop gap efforts, such as expanded short-term loans. He said that lenders are waiting for bailouts or incentives that the federal government will offer.

On the other hand, New Jersey Bankers Association co-chief executive officer and president John McWeeney said that less than 10 of his organization’s 121 members were affected by the REO properties crisis. He pointed out that many banks underwrite only residential loans and their loan portfolios are well-diversified.

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