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

With the commercial property sector sliding down to a crisis that could even be worse than the one felt by the residential real estate segment, it is easy to understand why the financial regulators have encouraged banks to step up their efforts to discover ways to allow commercial mortgage modification for borrowers who are in danger of foreclosure.  The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and other financial regulators are worried that the stability of the financial institutions could easily crumble with the onset of the upcoming wave of defaults by commercial property borrowers.  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.  Hence, if both parties could just reach a decision for a mutually beneficial commercial mortgage modification, there is a strong chance that both will feel the positive effects in the future.

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.  The regulators also pointed out that if the loan workout will bring down the classification of the mortgage, the bank examiners will not regard this as a black mark against the financial institution if the bank had followed the applicable standards in assessing the risks that would be inherent in the restructuring of the loan.

The bank regulators are concerned that if an agreement for a commercial mortgage modification could not be reached, then a foreclosure of the commercial property would be imminent and this could have detrimental effects on the bank, the borrower and the economy.  Obviously, the borrower will no longer have the income-producing property and this in turn would reduce its positive contributions to 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 borrower, it is usually prudent to get the services of a loss mitigation professional who can help in preparing the arguments that could be more effective in convincing the bank to approve a commercial mortgage modification.  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.  Because of the grave penalties for such violations, their discovery can provide the borrower with a substantial amount of leverage when negotiating with the lender for a restructuring of the loan.

Ready to learn more? You are welcome to visit us at our commercial loan modification blog. You may also want to read our recent blog post on commercial loss mitigation.