Importance of Commercial Loan Modification to Banks

The failure of the nine banks that were closed down by the Federal Deposit Insurance Corporation (FDIC) offers an important lesson for financial institutions. Those banks might have been able to continue operating had they intensified their efforts to permit more commercial loan modification agreements with the borrowers who experiencing some difficulties. A substantial percentage of these banks had been stricken by the unusually high number of commercial property loans that are found in their credit portfolios.

It is believed that the demise of the nine banks began when owners of commercial properties started to become delayed in their loan payments. As a result of the economic situation, a large number of the property owners are being forced into mortgage defaults because of their severely reduced financial capabilities. We can easily understand this if we take into account the large increases in vacancies in hotels, shopping centers, investment properties, business complexes, strip malls, warehouses, multi-tenant buildings, apartment buildings and office buildings that have severely brought down their incomes. And as more and more property owners found themselves unable to come up with their monthly payments, banks that have a relatively higher number of this kind of loan also discovered that their profits have substantially declined.

It no longer matters whether the decision of the banks to provide such a number of loans was prudent or not. Because the real estate industry was booming at that time, it is easy to see that they merely wanted to maximize the incomes of the financial institutions. However, they could have committed a more grievous mistake later when the market went into the downswing and borrowers started to default on their loans. And this was the failure to be more aggressive in looking for various solutions, such as a commercial loan modification.

The banks would have found that it was impossible to force the borrowers to come up with the monthly payments because the businesses do not sufficient cash flow as a result of the economic crisis. A commercial mortgage refinace would have given the borrowers more time to deal with the situation and then recover, and the cash flow for the banks would not have been gravely interrupted in the same way as in a foreclosure. Foreclosure should be the last option because it would not have been beneficial for the banks at all if they were unable to sell the repossessed properties right away to convert the assets into liquid cash that they could use for their lending business.

Thus, it is advisable for the banks to look more closely for ways to allow a commercial loan modification. Even if the monthly payments made by the borrowers would be reduced, this is much better than zero payments. Moreover, if the commercial property owners are able to financially recover, they could return to higher monthly payments in the future. It is therefore prudent for the banks to be more flexible when it comes to their standards, particularly when a financial crisis is happening. Cooperating with borrowers in searching for an answer, such as a commercial loan modification, could be a wise move for the banks.

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