The Associated Press reported a major development today regarding commercial mortgage modifications. A Policy Statement was released by the FDIC providing that banks will not be looked upon adversely by regulators for engaging in prudent commercial loan modifications. As I discussed extensively in my previous posts, one of the major reasons that banks have been hesitant in modifying these mortgages has been a direct result of the adverse treatment that the banks would be subject to at the hands of these regulators. Now, with this direct statement from the FDIC that they will no longer be subject to this criticism by regulators, the banks no longer have their hands tied behind their back.
Initial reports seem to indicate that so long as the modifications are done in a prudent manner including a thorough examination of the borrower’s creditworthiness, banks will be able to engage in the modifications without any adverse regulatory impact. Additionally, initial reports have indicated that a bank may modify a loan even if the loan is underwater. This is a major shift as in recent months many banks have been requiring principal pay downs on loans that are underwater as a prerequisite to a modification. All of this seems to bode well for borrowers.