Working at Workouts Harvard Case Solution & Analysis

Question 1

Why is the loan in default? Explain which reasons are most relevant to Drive. What economic factors contributed to the default? What about financing factors? Were there other reasons for the default? What about reasons personal to Burton? Which reasons are most relevant to Drive?

When the commercial property had boomed in 2005 and 2006, the owners of the commercial property had started to borrow huge sums of money from the commercial banks and also from the sophisticated investors indirectly through the sale of the mortgage backed securities. However, when the economy began to weaken in the latter half of 2007, all the commercial property owners were faced with lower rents and higher vacancies. The vacancies were increasing so that the tenants could maintain the rental level in the future.

As a result of this situation, the owners of the property had faced severe cash shortages and cash flow problems and they were left in an unenviable position for not being able to repay the outstanding obligations on their commercial loans that they had borrowed. Most of the borrowers had also tried to negotiate with their lenders and the approach varied from borrower to borrower. But after the financial crisis in 2008, such approaches for managing non performing mortgage loans did not work. This was because there was a huge drastic increase in the loan delinquencies as a result of the dramatic decline in the value of the commercial and the residential properties.

Working at Workouts Harvard Case Solution & Analysis

The property in subject, is the Northwinds Community Crossing and the cash flow of this property was tied to the local community which was Hispanic. As the construction industry had collapsed after the above economic factors and the financial crisis in 2008, the tenants had suffered a huge decline in their sales and Michael Burton, the owner of the property, had allowed his tenants to pay less for the contracted rent. As a result, Burton had faced cash flow problems and had not been able to service the note on time. This was the reason due to which the loan is in default. In terms of the financial reasons, one of the most important reason of the default was the loose underwriting performed by the Colonial National’s personal banker. The loan to value ratio at that time was 92.6% and it was no wonder that Colonial had failed and taken over in 2009 by FDIC.

Altogether, the economic climate of Georgia and the financial reasons stated above are the factors that had caused Burton to default on the loan and there were no personal reasons attached to the default on the loan except that Schey can seek deficiency judgment against the personal assets of Burton if the property is sold and the principle owned is not covered. The reasons that are most relevant to drive would include the economic and the financial reasons both and thus, Drive would also have to critically look at the Offer of note repayment made by Burton in the latest offer letter.............

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