Fish or Cut Bait?

Last Friday, the Federal Deposit Insurance Corp. issued a policy that encourages prudent commercial real estate loan workouts. The policy basically allows banks to modify and extend commercial real estate loans without those loans being adversely classified due to declines in the collateral’s value.

While the news was welcome relief to many banks that were forced to write down performing loans in bad markets, the move also has its detractors. “This is going to be a big deal and really going to affect the timing of any recovery. And not in a positive way,” says Mike Kelly, president of Denver-based Caldera Asset Management.

A recent study by Jones Lang LaSalle shows that a majority of lenders (55 percent) plan to offer commercial real estate borrowers extensions of up to six months on their maturing loans.

This year has already seen a record number of bank failures—more than 100 and counting. And the looming volume of commercial real estate maturities threatens to take down more financial institutions. Just as lenders don’t want to be landlords, the federal government doesn’t want to own banks.

But the question that comes to mind is how much leniency is too much? By further extending troubled loans, is the industry merely delaying an inevitable spike in distress, or will these moves allow financial institutions to hunker down and minimize the damage?

What do you think? APARTMENT FINANCE TODAY is working on an article about this very issue and wants to hear your views. Contact me at jascierto@hanleywood.com.