The failure of the nine banks that were closed down by the Federal Deposit Insurance Corporation (FDIC) offers an important lesson for financial institutions. Those banks might have been able to continue operating had they intensified their efforts to permit more commercial loan modification agreements with the borrowers who experiencing some difficulties. 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.
Presumably, the failure of the nine banks started when more and more property owners became late in in their monthly payments. As a result of the economic situation, a large number of the property owners are being forced into mortgage defaults because of their severely reduced financial capabilities. 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.
It no longer matters whether the decision of the banks to provide such a number of loans was prudent or not. 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. However, they could have committed a more grievous mistake later when the market went into the downswing and borrowers started to default on their loans. 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.
Thus, it is advisable for the banks to look more closely for ways to allow 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 therefore makes sense if banks tried to be more adjustable with their rules, especially if the economy is not doing well. Collaborating with the borrowers to find a solution, such as a commercial loan modification, may be the prudent decision to make.
This article has been brought to you courtesy of CLR
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