The number of commercial mortgage renegotiation deals is expected to increase after US bank regulators issued a policy statement recommending that banks sit down with distressed borrowers and try to find a viable solution. The regulators, led by the Federal Reserve and the Federal Deposit Insurance Corporation, expressed their belief that loan workouts could be advantageous for both property owner and bank. The statement observed that the property owners may have been just victims of the financial crisis and are still willing to repay the loan. The regulators also pointed out that the fact that current valuation of the properties is lower than the loan balance should not discourage the lenders from considering a loan modification.
The financial regulators may have issued the statement in view of warnings by experts that a crisis that may even be worse that the residential housing crisis is about to explode in commercial real estate loans. This crisis could result into the failure of many of the banks that in turn may cause widespread panic.
Through a commercial mortgage renegotiation agreement, the borrower will remain in possession of the property that would continue to provide income. This will allow the owner to come up with the modified monthly payments. On the other hand, the bank would not have to resort to a costly foreclosure process that would only result into the bank’s possession of a commercial property that has no buyers. With these loan workouts, a substantial percentage of the negative effects of the impending crisis may be avoided.