An article today by The Associated Press discusses an issue that I have felt for some time now has gone unaddressed by the media and the government. This issue is that of “whole” loans which are also referred to as portfolio loans. These are loans that are held by the lenders, as opposed to commercial mortgage backed securities (CMBS) loans that are packaged together and sold in the secondary market. It seems that all of the government programs that have been implemented or are in the pipeline solely address the issue of CMBS loans. This leaves the issue of whole loans which are held for the most part by smaller, local banks largely unaddressed.
Many of the loans that have come through my office are of the portfolio variety. Most are in default and the others are on the verge. As these loans increasingly begin to default, these smaller banks will come under increasing pressure and many more will begin to fail. Some of these banks have begun to open up to idea of modifying loans in order to cure or prevent defaults, but others are not as eager as a result of accounting rules that complicate the process. Without a change in these accounting rules and/or government programs encouraging commercial loan modifications, a second wave of bank failures will occur and further dry up what is left of the credit markets.