Commercial Loan Modification Deals May Help Banks Remain Viable

It is important for banks to enhance their efforts to establish commercial loan modification deals with distressed borrowers. This appears to be one of the lessons that can be learned from the shutdown of nine banks by the Federal Deposit Insurance Corporation (FDIC). Most of these financial institutions were badly hurt as a result of having a substantial number of commercial real estate debt in their credit portfolios.The problem is the increase in delays and defaults in commercial real estate loans. With the economic slow down, the owners of commercial properties are discovering that their capability to repay the debt has been drastically reduced. With the record increases in vacancies, owners of apartment buildings, multi-tenant buildings, office buildings, strip malls, warehouses, investment properties, business complexes, hotels, restaurants and shopping centers, are finding that their cash flows have been badly hurt. With some of the borrowers failing to make their monthly payments, banks holding a large number of this type of loan also found their cash flows being affected.The decision of these banks to provide a large number of this kind of loan may also be questionable. But those decisions were made during a time when the real estate market was booming. One could hardly blame them for trying to increase the banks’ net income with them. But the more serious mistake could have occurred much later as the borrowers began to default on their mortgages. It is understandable that lenders are averse to allowing a commercial loan modification because of its impact on cash flow. However, with the declining economy, a shift in perspective might be necessary.The banks would not have been able to force the borrowers to continue paying their mortgages when their businesses have been badly shaken by the sliding economy. If the borrowers have been given some space to breathe through a commercial loan modification, there could have been a chance for them to recover and the inflow of cash would not have been severely disrupted as in a foreclosure. Foreclosing the properties should be the last resort because it would not help the banks if the repossessed properties are not promptly sold to produce cash for the banks’ money lending business. There could only be a few interested buyers as the supply for such properties increase.It therefore makes sense for lenders to more seriously look at the possibility of a commercial loan modification. The reduced monthly payments would be much better than nothing. Add to this the fact that the business is being allowed to recover. In the future, this could result into an improvement in its monthly payments to the bank.Thus, there is a need for banks to be flexible and adjust certain rules to fit the state of the economy. Surely, stricter rules may be appropriate in a booming economy. However, when the financial situation is bleak, forcing the borrowers into foreclosure may result into the demise of the banks as well. Working together with the borrowers to search for a compromise, such as a commercial loan modification, may be the wise decision.

» Tags: , , , , , , , , , , , , , , ,

Comments are closed.