In the weakened economy, loan modifications have become an essential step on the road to recovery for the real estate market. Personal loan modifications have allowed homeowners to save money and remain in their homes, but commercial loan modifications are also an important factor in stabilizing the economy.
There was approximately $1 trillion worth of commercial real estate (CRE) loans as of June. At the end of October, CRE loan failures have reached the highest annual level since 1992, and the tally is expected to rise as loans pre-dating the housing market bust run out. Slow job recovery and vacant commercial space has led to a decrease in demand for CRE properties, whose value has dropped 35 to 40 percent in the last two years.
14.2% of all loans and leases in the nation's banking industry today are commercial. Many businesses are experiencing trouble repaying these loans under declining business growth, decreased property value caused by vacant buildings, and the delays on buying and selling that follow this fall in value.
In response to the growing importance of commercial real estate loans, The Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation (FDIC) announced last week that it is encouraging banks to modify CRE loans despite their dangerous connotation in the banking world. Regulators from the FDIC said that "prudent" loan workouts can be in the best interest of both the borrower and the bank itself.
The FDIC, which was created in 1933 by Congress, looks out for the welfare and stability of the nation's 8,195 banks. Following the closings of nine more banks across the nation on October 30, FDIC regulators expressed hope and offered guidance to banks struggling to provide commercial loan workouts. Community banks face the greatest stress with CREs. Many of these community banks originally developed a niche within the commercial loan market as a way to compete with larger banks.
The policy statement released on October 30 serves as a guideline for examiners but also for the banks themselves. It underlines that performing loans made to creditworthy borrowers "will not be subject to adverse classification solely because of the value of the underlying collateral declined." The policy is very specific about identifying and managing risk with the knowledge that often these loan modifications are dangerous to the institutions granting them.
Institutions are urged to remain balanced when assessing risk-management with workout activities, even for commercial real estate loans. The guiding factors for this risk management are financial accuracy, transparency, and timely loss recognition.
Since loan modifications are obviously for experiencing difficulty making their payments, it makes sense for them to be classified as more severe, but the new guidelines state that the loan grading will remain unchanged since CRE is based on reasonable repayment ability assessment. As long as the borrower has not fallen behind in their payments, there cannot be adequate reason for a more severe credit grading. And that should be encouraging news for business owners.
These new guidelines and clarifications put forth by major banking organizations underscore a dedication to commercial real estate workouts across the country. Though a different aspect of the real estate market, CRE loan modifications are another method to achieving sustained economic stability.
P&P Law has much experience in working with your lender to obtain a loan modification if you are struggling with mortgage payments. By negotiating with the banks, we can get you a more affordable payment and allow you to stay in your home. Please contact us with any questions or to schedule a free consultation.
