Commercial Loan Modification | Commercial Modification

Commercial Loan Modification and the Viability of Banks

The Federal Deposit Insurance Corp. (FDIC) had shut down nine failed banks under the multi-state holding company, FBOP Corp. Fortunately for the banks’ customers, the FDIC will cover the bank deposits up to $250,000. It is believed that the FBOP banks have been hurt by their focus on commercial real estate loans.

While the media had been focusing on the residential housing crisis, a similar problem had been brewing silently in commercial real estate loans. As a result of the economic slow down, owners of commercial properties have been experiencing drastic declines in their income. For example, apartments, office buildings, warehouses and strip malls, have seen record high vacancy rates and tenants demanding lower rent. This has caused some of these borrowers to default on their loans. This in turn has affected the viability of banks holding these kinds of loans in their credit portfolios.

Meanwhile, financial experts believe that the situation can only worsen as many of these loans approach the end of their terms and large balloon payments become due. The end result could be frightening as more banks succumb to the loss of income from many of these loans.

As a way to combat this crisis, bank regulators have been trying to convince banks to work out commercial loan modification deals with borrowers. The regulators know that foreclosure and repossession of the properties is not the answer. The banks will just be holding on to properties that they could not sell because of the state of the commercial real estate industry.