Hanasab & Zolekhian, LLP - Blog » commercial loan modification

Local Banks and Commercial Loans

Raymond Zolekhian — Fri, 06 Nov 2009 22:26:01 +0000

It seems that commercial real estate mortgages held on the books of local banks are finally getting the attention they deserve. After several months of both media and government attention on commercial mortgage backed securities, both the FDIC and the media are finally focusing on local banks as well. In an article in Business Week, they focused on the tremendous amount of commercial mortgages held by local banks and the dangers that this poses. It appears that the FDIC guidelines that were recently released were intended to address this issue; however, it seems that the banks have been very slow to familiarize themselves with the document. Many banks that I have spoken to this week were either unaware of these new guidelines or had yet to review them.

I would hope that once the banks have time to review and implement these guidelines, the process for obtaining a commercial loan modification will be more efficient and streamlined. It appears that this was the intent of the FDIC and will be to the benefit of both banks and borrowers. At the end of the day there will undoubtedly be many loans that are beyond repair and foreclosures on commercial properties will be inevitable, but these guidelines should be able to slow down the bleeding.

FDIC Regulations Released

Raymond Zolekhian — Fri, 30 Oct 2009 23:44:33 +0000

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.

FDIC Failed to Enforce Guidelines

Raymond Zolekhian — Tue, 20 Oct 2009 00:52:45 +0000

In another Bloomberg article today, it was reported that the FDIC basically dropped the ball when it came to enforcing their own guidelines. In 2006, the FDIC set forth guidelines providing that banks should not have commercial real estate holdings that exceeded 300 percent of their capital. I guess it’s pretty fair to say that nobody was really paying attention to those guidelines. Many of the banks that have already failed had commercial real estate holdings that well exceeded the 300 percent threshold and it is almost certain that many of the banks that are currently on the brink of failure are similarly situated.

This is likely one of the major reasons that the FDIC will soon be announcing a set of guidelines for commercial mortgage modifications. You hope that the FDIC will be better at implementing these guidelines than they were at implementing the 2006 guidelines. A comprehensive set of guidelines for the modification of commercial mortgages is likely the only solution for the impending collapse of the real estate markets. Had the banks not been so highly leveraged and had they not so highly leveraged almost all of their loans, the market may not have reached the breaking point that it is currently at. But the banks did not follow the rules and the FDIC did not enforce them, so there is blame to be shared by everyone.

Write-downs on Commercial Real Estate to Continue

Raymond Zolekhian — Mon, 03 Aug 2009 21:26:31 +0000

Another day and another article sounding the alarm of the impending collapse of the commercial real estate markets. Reuters reported today that the worst is yet to come for real estate loans. Analysts estimate that banks will likely continue to take write-downs on commercial loans for the next two years and the number of such loans in default will continue to rise. Although the article doesn’t propose or discuss solutions to this problem, there seem to be only a couple of options. Lenders can begin to foreclose on defaulted properties. That, however, is costly and forces banks to go into the business of owning real estate which is not what a bank is in the business of doing. Also, in all likelihood banks will suffer a loss on the sale of the property. Lenders can also sell notes that they hold at a discount. This also, however, ensures that the bank will take a loss on their investment but it provides them the comfort of knowing that another bad loan is off their books. Another option is to negotiate a commercial loan modification. This allows the bank to save on the cost and expense of a foreclosure and gives them the opportunity to recoup their principal, something not possible when they sell the note.