Kicking The Can Down The Road

by Doug Marshall, CCIM
Market Assessment
Published November 23, 2009

In my market assessment dated November 3, I identified seven things that need to occur before commercial real estate lending can return to some semblance of normality.

Some of these are obvious. Others are counter-intuitive. In order to recover:

• The overall economy must improve
• Commercial real estate fundamentals need to stabilize
• Foreclosures need to occur so banks can cleanse their balance sheets of non-performing assets
• Weaker banks need to fail
• Lenders need to extend, amend, and pretend
• Inflation needs to happen, and
• A new version of the CMBS product needs to be created.

Over the past year, some of my readers have criticized my interpretations of what's happened in the commercial real estate market as being far too pessimistic. Maybe they're right. I don't know, to be honest.

But to those who agree with this assessment I make this pledge: whenever I can find worthy commercial real estate news that will provide evidence of a thawing in the liquidity crisis or in the real estate market in general, I will bring it to my readers' attention.

Such is the case in today's market assessment.

Recently, the FDIC, the Federal Reserve, and the Office of Thrift Supervision have published new rules for modifying loans to creditworthy customers. This comes under the category of 'kicking the can down the road.'

This is good news; not only good news but plain common sense, something that seems to be lacking these days. The fact remains that it is in the best interest of both groups - banks and investors - to avoid foreclosure by any means possible.

Regulators are recommending that loans be amended for investors who are on time with payments, even if the real estate isn't performing as well as expected or desired.

The regulators have made it clear, in the new rules, that these kinds of loans by banks will not be classified as high risk.

While the new regulations require banks to be careful and conservative, to say the least, they also approve of the modification - through lower interest rates, extended loan terms, or a longer amortization - of properties currently held that would be foreclosed on otherwise.

It is to be hoped that a lot of banks will be able to extend these loans so that they outlast the current sour economy.

It's going to be interesting to see which banks will be able to extend and modify loans for the sake of their customer base and for their own self preservation. The future of the real estate market will depend on it.

Let's hope that the lending institutions come to see it that way, too.

Sources:
New Rules For Modifying Commercial Property Loans, Seattle Daily Journal of Commerce, dated November 2 2009