In view of the rapidly dropping market values of commercial properties, such as shopping centers, strip malls, warehouses, apartment buildings, hotels and office buildings, experts have been warning that the next crisis would be in commercial real estate loans. For one, record-high vacancy rates have been hurting the cash flow of landlords, making it harder for them to come up with the monthly mortgage payments. On top of that, tenants are becoming bolder in asking for lower rents in view of the rising number of vacancies. Moreover, some tenants are simply leaving without paying their rent after filing for bankruptcy.
The losses resulting from troubled commercial real estate loans are starting to be felt by the banks and other lenders. It has been observed that a number of the 106 banks that had shut down their operations this year that were under the supervision of the Federal Deposit Insurance Corp. (FDIC) had substantial losses in such loans. Meanwhile, one of the biggest real estate lenders is expected to file for bankruptcy. This impending demise of a such a large lender is expected to worsen worries that the losses in commercial real estate loan will cause an avalanche of write-downs for the big financial firms. There are also fears that the capability of the FDIC to cover for the deposits of failed banks might no longer suffice in the future.
In an attempt to counter the imminent crisis, banking regulators have been urging banks and other lenders to sit down with the borrowers and try to discover a solution to the problem, such as a loan modification. The regulators are pointing out that judicious adjustments to the loan terms may be advantageous for lender and borrower. However, the regulators also warned the banks that it is still vital to look into the creditworthiness of the borrower and to ensure that risks are minimized in their credit portfolios.
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