SE LA Times

Lenders are using "vulture tactics" to prey on borrowers hard struck by the COVID-19 pandemic's economic impact, a Costa Mesa hotel general manager said in a recent letter to his congressional representative.

The lenders that hover over the pandemic-distressed properties "are well within their legal rights," Hilton Orange County/Costa Mesa general manager Benito Benitez said in his April 2 letter to Democratic Rep. Harley Rouda.

In a copy of the two-page letter obtained by SE LA Times, Benitez told Rouda that the lenders' schemes are "unconscionable from a moral perspective and stand starkly against the principles that we share here in the United States."

"Frankly, to take advantage of this crisis for the sake of better returns for some New York hedge fund strikes me as unAmerican," Benitez continued in his letter. "The negative impact to hotel owners and their employees of these vulture tactics will be long lasting."

The coronavirus pandemic "will get much worse before it gets better," Rouda said in a video posted to his Facebook page about what to expect, what he and his office are doing and what people can do.

In his March 30 video, Rouda referred to estimates by National Institute of Allergy and Infectious Diseases director and White House health advisor Anthony S. Fauci that more than 100,000 could die in the U.S. alone.

"We have to take it seriously," Rouda said. "All of us have to take it very seriously."

The $2 trillion CARES Act passed by Congress late last month provides some foreclosure relief, mostly for family-owned properties.

In addition, some states have set up foreclosure moratoriums and stays, often covering both small and large properties from lenders' actions to seize assets when payments are not made during the pandemic.

California is one of those states, thanks to a March 16 executive order issued by Gavin Newsom. The order, which went into effect on March 30, largely covered family dwellings and excluded larger properties.

Larger properties received some protection in an interagency statement issued March 22 by the Federal Reserve, FDIC and other regulatory agencies that encouraged the nation's banks to work proactively with borrowers hit hard by the coronavirus pandemic.

"The agencies encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19," the statement said. "The agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19. The agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs)."

Benitez called the interagency statement "undoubtedly a step in the right direction" but said not all borrowers have loans from FDIC-insured banks.

"However, billions of dollars of hotel loans in our country come from unregulated non-banks such as hedge funds and other investment funds," Benitez said. "Since the Federal Reserve and the FDIC have no direct oversight of these firms, they are unlikely to follow the previously mentioned guidance. They are more likely to take a different approach: the use of vulture tactics to extract as much 'value' out of the hotel as possible without any regard for the current crisis or the hotel employees or hotel owners involved."

The vulture tactics include accelerating the foreclosure process to gather as many distressed properties as possible, using "small technical ways" to rush loan defaults, denying borrowers existing escrowed funds and slowing reimbursements on collateral, Benitez said.

"Representative Harley Rouda, I urge you, Congress, the Federal Reserve and other governmental agencies to move quickly to address this situation before hotels across this country are mercilessly foreclosed on due to no fault of their own," Benitez said. "To the extent additional legislation related to COVID-19 is proposed, I would recommend adding language that introduces an 18-month moratorium on ALL foreclosure proceedings for ALL lenders to hotels. This should give hotels the time they will need to come up with reasonable solutions and strategies with their lenders to ensure that they have their loans paid off and avoid unnecessarily enriching hedge fund vultures."

SE LA Times sought comment from Wells Fargo, BAML, Key Bank, Prudential, JPM, Apollo, Aareal Bank, Morgan Stanley, Midland, Artemis, Ares Capital, Deutche Bank, Raith Capital, Clarion Partners, Principal Real Estate Investors, Blackrock, Starwood Capital, Southside Bank, Schroders and Brookfield Asset Management.

Of those contacted, only two responded saying, they were not authorized to speak to the press.