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.

Tags: commercial loan modification, commercial real estate, default, foreclosure