Reasons Why the Regulators Urged Banks to Push for Commercial Mortgage Modification

With the commercial real estate market about to go into a crisis that may actually even be worse than the one experienced by the housing sector, it is easy to figure out the reasons why the bank regulators have urged the lenders to enhance their efforts in finding ways to approve a commercial mortgage modification for their property owners on the brink of foreclosure.  The Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and other regulators are concerned that the viability of the banks and lenders could be severely compromised as a result of the expected large number of defaults by commercial  property owners.  The commercial borrowers are undergoing financial difficulties caused by lengthy absorption times for rental and sales, the drop in property market values, and the decline in their cash flows.

The regulators also realize that a substantial number of these troubled property owners can still be depended upon when it comes to repaying loans and that they are only temporarily prevented from doing so.  Therefore, if both lender and borrower can find a way to agree on a beneficial commercial mortgage modification, they are bound to benefit from this decision in the long run.

According to the bank regulators, there are different types of commercial mortgage modification deals, such as the offer of additional credit, the extension of the term of the mortgage, adjustments to the payment terms, and the renewal of some of the provisions.  As a way to encourage the lenders, the regulators have also stressed that if the workout deal will lower the classification of the loan, the bank examiners will disregard this and will take it as a negative score against the bank if the lender had applied the appropriate standards in evaluating the risks that come with the loan modification.

The financial regulators want to prevent foreclosures that could have untoward effects on the economy, the borrower and lender if both parties are unable to come up with a commercial mortgage modification agreement that is acceptable to them.  Naturally, the borrower will suffer the consequences of losing an income-producing asset and this will also have unwanted repercussions on the economy.  After spending so much on the foreclosure proceedings, the lender will also experience the negative impact of possessing a property that it could not sell because the market is filled with a large number of such properties.

As for the property owner, it would be advisable to hire a loss mitigation expert to make sure that the arguments for a commercial mortgage modification are effectively provided.  This consultant will often perform a forensic loan audit that is designed to search for violations committed by the lender against laws and regulations that have been put in place by the government to protect the rights of borrowers.  Violators of these laws and regulations face severe penalties, thus, offering the property owner with a potent tool for convincing the lender to approve an application for debt restructuring.

Do you want to learn more about commercial loan modification? You are welcome to visit us at our commercial loan modification blog. You should also check out our recent post on Commercial Loan Brokers.