How Banks Can Benefit From More Commercial Loan Modification Agreements

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 could have survived if they had increased their efforts to allow more commercial loan modification deals for their troubled borrowers. It had been observed that most of these companies were negatively affected by the unusually large number of commercial real estate loans in their credit portfolios.

It is believed that the demise of the nine banks began when owners of commercial properties started to become delayed in their loan payments. Because of the financial crisis, many of the borrowers could not help it but default in their obligations because their capabilities to repay the loans have been badly compromised. 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 industry was booming at that time, it is easy to see that they merely wanted to maximize the incomes of the financial institutions. The problem could have started when the market reversed and the property owners began to be late in their payments to stop paying altogether. And this was the failure to be more aggressive in looking for various solutions, such as a commercial loan modification.

The banks would have found that it was impossible to force the borrowers to come up with the monthly payments because the businesses do not sufficient cash flow as a result of the economic crisis. A commercial loan modification would have given the borrowers more time to deal with the situation and then recover, and the cash flow for the banks would not have been gravely interrupted in the same way as in a foreclosure. Foreclosure should be the last option because it would not have been beneficial for the banks at all if they were unable to sell the repossessed properties right away to convert the assets into liquid cash that they could use for 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.

by: Michael Bartonolis

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