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Lenders 'Extend and Pretend' to Handle Commercial Borrowers Who Can't Pay

July 12, 2010

As Riverside commercial real estate loan modification attorneys, we were interested to see an article in the Wall Street Journal July 7 identifying the trend toward "extend and pretend" among commercial real estate lenders. Also known as "delay and pray," this is a slang term for the practice of modifying or simply renewing a loan to a commercial real estate borrower who cannot pay, in hope that the market will recover and the borrower will eventually be able to repay the loan. The term is used by critics of the practice or skeptics who doubt that the tactic will pay off. But according to the article, banks who grant these commercial loan modifications are coming under scrutiny by people who are concerned that the practice will ultimately hurt the health of banks and hide the extent of the commercial real estate crisis.

According to the article, commercial real estate values are 42% below their peak in October of 2007, the height of what is now acknowledged as a commercial real estate bubble. Banks hold $176 billion in CRE loans that are going bad, according to one analyst, and about two-thirds of the CRE loans maturing between now and 2014 are underwater. Some lenders say that extending loans or modifying them in some other way is smart -- it can allow the bank to collect the full amount of the loan later, rather than foreclosing now and dumping the property into a depressed market. In essence, it's a bet that the CRE market will improve. But if the market doesn't improve, the article noted, banks had better have the cash on hand to write off those properties later. And some critics say loan modifications deter new loans by tying up capital, or keep the real estate market from hitting bottom and rebounding.

Our Los Angeles County commercial real estate loan modification lawyers believe that banks that "extend and pretend" are making the best business decision they believe they can with the economy they're dealt. Commercial investors are having trouble repaying loans right now because the bad economy is keeping businesses from renting space and keeping rents low when they do sign on. The commercial real estate crash has also plunged properties underwater, making it impossible to refinance. Lenders faced with this situation can foreclose, which makes them owners of underwater properties in a depressed market -- or they can hold on for a year and hope the economy improves. This benefits everyone in the long run, as long as those lenders have made contingency plans in case the economy doesn't improve. The practice may tie up capital, but as the article points out, writing off a loss also wipes out capital.

Howard Law PC has represented individual homeowners seeking loan modifications throughout the residential housing crisis. Since the commercial real estate crisis hit, we have offered the same services to commercial investors. Commercial loans are, if anything, more difficult in some ways to modify than residential loans because of their size and because they mature in just a few years. Unfortunately, some lenders are just as reluctant to modify commercial loans as they were to modify residential mortgages, fearing that the borrower will ultimately not be able to repay the loan and they will lose profits. Our job as Irvine commercial real estate loan modification lawyers is to help CRE investors convince their lenders that a modification is a risk worth taking, through aggressive negotiations and, if necessary, legal action.

If you're a commercial real estate investor and you're considering a loan modification to handle repayment problems. Howard Law can help. To learn more or set up a free consultation, please contact us through our website or call 1-800-872-5925.