With the economy still in a troubled state, finding providers of commercial real estate refinancing could be very difficult for the various property owners whose loans will soon be due in 2010. The problem with these loans is that a large amount, which is known as the balloon payment, is due at the end of the loan. Usually, the borrower will have to seek for a buyer or for a provider of refinancing.
However, experts fear that locating the funds for the $2 trillion worth of commercial real estate loans will be very difficult. First of all, only a few banks and lenders would agree to refinance the loans. Secondly, the market values of these properties have been declining, thus resulting into a substantial loss of equity for the borrowers. The lender who would be providing the refinancing would require the borrower to pay a substantial amount of down payment. With these impending problems, experts predict that two-thirds of these loans would be in danger of foreclosure.
Sensing trouble ahead, US banking regulators are encouraging banks to find ways to work with the property owners to find a way to make adjustments to the commercial real estate loans. The Federal Financial Institutions Examination Council, of the which the Federal Deposit Insurance Corp. and the Federal Reserve are members, pointed out that prudent modifications to the loans are usually beneficial for both parties.
To increase the motivation of lenders to find a loan workout solution, the regulators have also declared that they would not impose any penalties on banks for those loans where the value of the property is less than the outstanding loan balance. The regulators stressed, however, that this does not mean that the lender should not follow good underwriting guidelines or fail to determine the risks in their loan portfolios.
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