The Federal Financial Institutions Examination Council has issued a suggestion that commercial real estate lenders, such as banks, should collaborate with the borrowers to find ways to modify their loans to prevent foreclosure. The regulators, including the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, are trying to encourage banks by declaring that they would not take it against them if the market value of the commercial property is lower than the unpaid loan.
The agencies also pointed out that as long as the commercial real estate lenders conduct a comprehensive review of the capability of the borrowers to repay the loan, they would not criticize them for coming out with such loan workout deals.
The guidance from the bank regulators is in response to the observation that the commercial real estate industry has begun to show signs of an impending crisis. A study by the FDIC for the second quarter of 2009 has shown that the number of loans used for real estate construction and development that are delayed in their payments by at least three months has increased by 16.6 percent.
However, the regulators clarified that this does not mean that the lenders will be careless in their approval of the loan modification applications. They pointed out that banks should always follow approved underwriting practices and make sure that they properly identify risks.
Meanwhile, this may be good news for commercial property owners who are worried about the threat of foreclosures. Perhaps, what is needed is for them to approach their lenders to find out if a loan workout is possible.
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