Banks May Remain Profitable by Approving More Commercial Loan Modification Agreements

By MyVine | October 3, 2011

The demise of the nine banks whose doors were slammed shut by the Federal Deposit Insurance Corporation (FDIC) provides a vital lesson for the financial services industry.  Those banks could have survived if they had increased their efforts to allow more commercial loan modification deals for their troubled borrowers.  A substantial percentage of these banks had been stricken by the unusually high number of commercial property loans that are found in their credit portfolios.

It is believed that the demise of the nine banks began when owners of commercial properties started to become delayed in their loan payments.  Because of the financial crisis, many of the borrowers could not help it but default in their obligations because their capabilities to repay the loans have been badly compromised.  This is easy to see because of the sharp increases in vacancies for shopping centers, hotels, business complexes, investment properties, warehouses, strip malls, office buildings, multi-tenant buildings and apartment buildings that have caused significant declines in cash flow.  And as more and more property owners found themselves unable to come up with their monthly payments, banks that have a relatively higher number of this kind of loan also discovered that their profits have substantially declined.

Whether the decision of the banks to have such a huge number of loans in their portfolios was a wise one or not is no longer the issue.  Because the real estate market was then in the upswing, it is easy to understand why they chose to provide so many of this type of loans to maximize the banks’ income.  The problem could have started when the market reversed and the property owners began to be late in their payments to stop paying altogether.  And this was the failure to be more aggressive in looking for various solutions, such as a commercial loan modification.  

Try as they might, the banks would have been incapable of forcing the property owners to come up with the mortgage payments when their businesses are failing to generate enough income in view of the state of the economy.  A commercial mortgage refinace would have been helpful in providing the owners with more time to find a solution for their situation and then regain lost ground, and the income of the banks would not have been greatly affected in a similar way as in a foreclosure.  Foreclosure should really be the last alternative because it does not help the banks at all if the foreclosed properties could not be sold quickly to produce the money that is more valuable for the their lending business.  

Therefore, it may be a wise decision for the banks to examine more closely the possibilities for a commercial loan modification.  Even if the monthly payments made by the borrowers would be reduced, this is much better than zero payments.  Moreover, if the commercial property owners are able to financially recover, they could return to higher monthly payments in the future.  It is therefore prudent for the banks to be more flexible when it comes to their standards, particularly when a financial crisis is happening.  Collaborating with the borrowers to find a solution, such as a commercial loan modification, may be the prudent decision to make.

Check out CLR for more inforation at http://www.commercial-modification.com

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