Commercial Real Estate – The Next Financial Crisis

Several years into the residential real estate crisis, another one looms just around the corner: Commercial Real Estate. Trillions of dollars worth of commercial mortgage loans are about to reset. Problem: Decreasing property values has prevented many commercial property owners from refinancing. But there is some good news.According to a October 30th 2009 press release posted on the FDIC.Gov website, the “Prudent CRE Loan Workout Guidance” was adopted by various federal government agencies.The FDIC press release stated: “This policy statement stresses that performing loans, including those that have been renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral declined.”This is good news to commercial property owners who are still creditworthy, but can’t refinance due to current economic conditions. The Prudent Commercial Real Estate Loan Workout policy gives financial lending institutions the tools needed to be proactive in preventing loan defaults now and down the road.The new Prudent Workout guidelines also stated factors that a bank would consider during a loan workout: “The borrower’s ability to repay the loan, the borrower’s willingness and capacity to repay the loan under reasonable terms and the cash flow potential of the underlying collateral or business.”Since a good number of commercial properties, such as apartment buildings have the cash flow but can’t refinance and the owners have been paying the mortgage loan on time, they would make good candidates for a commercial loan workout.Banks, facing a potential onslaught of loan defaults are more willing to help borrowers by performing commercial loan workouts. Commercial loan workouts are special arrangements lenders make with delinquent borrowers to avoid going into foreclosure down the road. Workouts can consist of making payment arrangements, lowering the interest rate, extending the maturity date or even lowering the principal balance. The whole process usually takes between 30 to 60 days.An important thing to remember when seeking a commercial loan workout is whether or not its in the bank’s or lender’s best interest to approve a commercial loan workout or permit foreclosure. A key factor is the overall financial standing of the delinquent property owner. Does the owner have or will have enough cash flow to repay the loan? This and many other factors will determine if a commercial loan workout is the best solution.Banks don’t want the headache of having a non-performing asset on their books. Having a large number of non-performing loans on their books may gain the interest of government regulators who oversee the banking industry. Even the regulators have updated their guidelines to help commercial real estate owners facing foreclosure.

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