With the commercial real estate market about to go into a crisis that may actually even be worse than the one experienced by the housing sector, it is easy to figure out the reasons why the bank regulators have urged the lenders to enhance their efforts in finding ways to approve a commercial mortgage modification for their property owners on the brink of foreclosure. The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and other financial regulators are worried that the stability of the financial institutions could easily crumble with the onset of the upcoming wave of defaults by commercial property borrowers. The property owners are experiencing difficult times as a result of the reduction in their cash flows, the decline in the values of their properties, and absorption periods for rental and sales that are too long.
The financial regulators are also aware that a large percentage of the distressed commercial borrowers are still capable of repaying the mortgage and that they are just unable to do so at the moment because of the economic situation. Therefore, if both lender and borrower can find a way to agree on a beneficial commercial mortgage modification, they are bound to benefit from this decision in the long run.
According to the bank regulators, there are different types of commercial mortgage modification deals, such as the offer of additional credit, the extension of the term of the mortgage, adjustments to the payment terms, and the renewal of some of the provisions. The regulators also pointed out that if the loan workout will bring down the classification of the mortgage, the bank examiners will not regard this as a black mark against the financial institution if the bank had followed the applicable standards in assessing the risks that would be inherent in the restructuring of the loan.
The bank regulators are concerned that if an agreement for a commercial mortgage modification could not be reached, then a foreclosure of the commercial property would be imminent and this could have detrimental effects on the bank, the borrower and the economy. Obviously, the borrower will no longer have the income-producing property and this in turn would reduce its positive contributions to the economy. The lender will also be negatively affected because it will just be stuck with an asset that is almost impossible to sell in a situation where the market is experiencing a glut in repossessed properties, aside from incurring the hefty costs of pursuing the foreclosure proceedings.
As for the borrower, it is usually prudent to get the services of a loss mitigation professional who can help in preparing the arguments that could be more effective in convincing the bank to approve a commercial mortgage modification. This professional will also conduct a forensic loan audit to find out if there are any indications that the lender had violated certain laws and regulations governing the rights of borrowers when it provided the loan in the first place. Violators of these laws and regulations face severe penalties, thus, offering the property owner with a potent tool for convincing the lender to approve an application for debt restructuring.
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