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Bailout Watchdog Predicts Half of Commercial Loans Will Be Underwater by 2011

April 12, 2010

Our Irvine commercial real estate loan modification attorneys wrote last month about dire predictions by Congressional watchdog Elizabeth Warren. Warren, a Harvard professor and chair of the committee overseeing how TARP "bailout" funds are spent, said in her committee's February report to Congress that commercial real estate foreclosures could threaten banks with as much as $300 billion in losses. Warren built on that prediction in a recent interview with CNBC, the New York Times DealBook blog reported March 30. She told the financial network that half of all commercial loans will be "underwater," meaning the property will be worth less than the value of the loan, by the end of this year.

Warren made her statement as part of a larger interview on the health of the economy generally. However, she said she believes the commercial real estate failures will have a dramatic effect on the economy because they could bring down mid-sized banks. She said 2,988 banks have "dangerous concentrations" of commercial lending, and all of them will be threatened with a lack of stability if those loans fail. The situation may even be made worse, she said, by the fact that many banks are already suffering because of the subprime residential real estate crisis. If they are hit with further losses from the commercial market, Warren believes they will lose capital available to lend to small businesses -- something economists believe is essential to the economic recovery.

Of course, being underwater does not automatically mean you will default on the loan. But as Long Beach commercial loan modification lawyers, we know there's a strong correlation between the two, especially in commercial real estate. Residential mortgages are usually scheduled to be paid back over 15 to 30 years, but CRE loans usually come due in two to four years. That means commercial owners can't try to "wait out" the market in the time that residential buyers have. Usually, CRE borrowers refinance when they hit their due dates, but refinancing is not an option for most borrowers who are underwater. That means they have no choice but to default unless they can convince the lender to modify the loan instead.

Howard Law PC represents CRE borrowers in their efforts to modify commercial loans. We understand how reluctant banks can be to grant loan modifications because we've been working with residential borrowers throughout the housing crisis. That's why we take an assertive approach to negotiating loan modifications, including litigation when appropriate. Our Del Mar commercial real estate loan modification attorneys are proud of our record of success in both types of loan workout, which includes cases where we won lower interest rates, longer repayment periods, changes to the loan's structure and even some principal write-downs. In many cases, we find that just having an attorney involved helps the lender see more options than it had previously considered.

If your business is struggling in the bad economy and you're concerned that you won't be able to repay a CRE loan, you should call Howard Law for help. We offer free, confidential consultations, so you risk nothing by speaking to us about your case and your legal rights. To set one up, please call toll-free at 1-800-872-5925 or send us a message online.