The Reasons Why Bank Regulators Are Pushing For Commercial Mortgage Modification

With the commercial property sector sliding down to a crisis that could even be worse

than the one felt by the residential real estate segment, it is easy to understand why the financial regulators have encouraged banks to step up their efforts to discover ways to allow commercial mortgage modification for borrowers who are in danger 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 commercial borrowers are undergoing financial difficulties caused by lengthy absorption times for rental and sales, the drop in property market values, and the decline in their cash flows.

The regulators also realize that a substantial number of these troubled property owners can still be depended upon when it comes to repaying loans and that they are only temporarily prevented from doing so. 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. As a way to encourage the lenders, the regulators have also stressed that if the workout deal will lower the classification of the loan, the bank examiners will disregard this and will take it as a negative score against the bank if the lender had applied the appropriate standards in evaluating the risks that come with the loan modification.

The financial regulators want to prevent foreclosures that could have untoward effects on the economy, the borrower and lender if both parties are unable to come up with a commercial mortgage modification agreement that is acceptable to them. Naturally, the borrower will suffer the consequences of losing an income-producing asset and this will also have unwanted repercussions on 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 consultant will often perform a forensic loan audit that is designed to search for violations committed by the lender against laws and regulations that have been put in place by the government to protect the rights of borrowers. 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.

by: Michael Bartonolis

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