How Commercial Mortgage Modification May Contribute To The Economy
Economic experts have been foreseeing the emergence of a crisis in the commercial
property market that could even be worse than that situation in residential housing. The increasing number of vacancies in commercial properties and the unchecked increase in the unemployment rate are harbingers of potential serious problems in this particular market. This is a logical prediction because the end result of this kind of situation are problems for the property owners in making the monthly installments. And if they could not make the monthly payments, it naturally follows that they would not also be able to make good with the balloon payment at the end of the loan term. Just like in the residential real estate market, this could ignite a series of defaults and foreclosures that could further bring down the economy. Luckily, commercial mortgage modification could offer a helping hand for the economy, the banks and the borrowers.
A possible way for this to work is that the bank may permit a permanent or temporary decrease in the rate as a way to help the borrower avoid foreclosure. This is important because thousands of dollars could be eliminated from the debt burden of the borrower every month with just a one percent drop in the interest rate. In this way, commercial mortgage modification could help much in offering some space for the borrower to breathe while looking for more tenants and while waiting for the economy to get better.
Another commercial mortgage modification strategy is to extend the maturity of length of the loan. This could push back the due date of the balloon payment or even let the borrower completely avoid it if a source for refinancing is located. Commercial loans usually have balloon payments because the monthly installments are often based on a longer term than the actual duration of the mortgage. To illustrate, the monthly payments may be computed with 25 years as the loan duration but the real term may only be for 10 years. Therefore, a large amount has to be paid just before the mortgage expires. During better times, the commercial property borrower will either find a buyer for the property or search a bank to provide another loan to in order to come up with the balloon payment. But with the economic crisis where there are less available funds and property values have dropped substantially, looking for a source of funding could be tough. In the same manner, searching for potential buyers would also be a tough undertaking.
A commercial mortgage modification may also permit the borrower to hold back on the payments for a certain period of time. To illustrate, the borrower may be allowed by the bank to skip three to six months in the payments without incurring penalty charges. This would permit the property owner to look for more tenants and find ways to come up with the payments.
Meanwhile, commercial mortgage modification is also one of the workouts that are being touted by bank regulators to help the banks remain viable. With the number of foreclosures minimized, the economy could have a stronger chance for faster recovery.
by: Michael Bartonolis
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